A new credit rating scale for cryptocurrency and venture capital investments
The recent cryptocurrency correction highlights the risk of blockchain investments. Thrilled by extreme valuation, some investors have probably neglected the risk embedded in this new business. At Vidal Capital we are working hard to provide investors with best in class market intelligence tools. One of our tools is a new credit rating framework (DNotches) that we apply to cryptocurrencies. In this short article I would like to share our new credit rating scale.
Rating systems provide simple ranking to evaluate future creditworthiness of securities. If for standard investments, investor can rely on well-known rating agencies, it is not the case for cryptocurrencies and other digital assets.
The standard rating scale (Moody’s, S&P) is AAA, (almost no default), AA1, AA2, AA3, A1, A2, A3, BBB1, BBB2, BBB3, BB1, BB2, BB3, B1, B2, B3, CCC1, CCC2, CCC3, CC, C and D (default). This range is used for companies with already established businesses. In order to cover Venture capital, startup or cryptoasset investments, the scale has to be extended. A natural way would be to:
- extend category CC and C
- introduce VC (Venture Capital) and FFF (business angels) categories in order to represent the distinct phases of a start-up and venture capital investment.
The final scale would take the following form:
Personally, I find such a scale over-complicated. First the rating naming convention does not immediately highlight the investment style category. Secondly ICOs are democratizing crowdfunding, usually reserved to big investors, meaning that the distinction between business angels and venture capitalist investors is vanishing.
That is why at Vidal Capital we created a new credit rating scale. We called it the SOFI credit rating scale. Every letter refers to the investment style and how we focus our analysis of a company:
- S for proof of Stability, for companies with well-established business
- O for proof of Operations, for companies where performance is sensitive to the good execution of projects
- F for proof of Fundamental of Financial, for growing or declining companies (distressed investments)
- I for proof of Idea, for startup, venture capital or any new businesses
Obviously, the SOFI credit rating scale can be directly mapped with the extended credit rating scale.
The SOFI rating scale is supported by our new credit rating framework (DNotches). The model is used:
- to evaluate cryptocurrency relative risk (Bitcoin against Ethereum, …)
- to evaluate cryptocurrency risk against standard investments.
We also provide a credit spread equivalent measure, the crypto spread (expressed in bp) that I will talk about in future articles.
In this article, I have described the new credit rating scale that we use at Vidal Capital. Coupled with our risk framework, this new scale provides a definitive way to integrate cryptocurrencies as an asset class along with standard investments. By doing so, we hope to bring investment clarity to any financial advisor or potential investor.
