What are risk rating agencies and how do they influence the crypto market?
The international financial market is probably one of the wildest contexts we can face. With hundreds of companies and institutions trying to promote their products, to convince you that they are the best way to invest your capital. Therefore, risk rating companies play a vital role, not only in the traditional market, but also in the cryptocurrency market.
What are risk rating agencies?
The world is very uncertain and ordinary citizens do not have the time or the capacity to carefully evaluate the accounts of states and companies to know what their financial situation is.
This generates an information bias when making investments in the stock market, because if the financial health of a company or government is not known, we will not know what kind of problems could arise in it.
Thus, a potential market is created that is capitalized by the risk rating companies. They are companies that are in charge of studying the financial status of a company or government and classifying the possibilities that the reviewed organization will default.
In short, they are responsible for issuing an informed opinion about the debtor’s solvency.
This activity turns out to be of prime importance within the modern world financial market. Well, thanks to these ratings, investors have the ability to know the strength of a company or government in which they plan to invest.
For this reason, the confidence of risk rating companies such as Standard and Poor’s and Moody’s is such that their opinion about the payment possibilities of some organization is assumed to be a reality by the markets practically automatically.
Its effects on the market and cryptocurrencies
The opinions of risk rating agencies have the potential to sink or raise the price of a financial product. Representing an immense risk when they are wrong in their evaluations, as happened in 2008.
The triple AAA rating (the highest) given by the rating agencies to junk bonds created by investment banks, is the central element that allowed the massive acquisition of them by institutional investors and the subsequent bankruptcy of the American financial system.
However, in the case of cryptocurrencies, the risk rating companies have not had such an important performance. Concentrating on the traditional financial market and, therefore, on the evaluation of companies and governments, rather than currencies, especially virtual currencies.
However, in recent years companies have emerged that have decided to venture into this area. With the company Weiss Ratings at the forefront, being the first to start rating cryptocurrencies.
On the other hand, the main risk rating company in China, Dagong Global Credit Rating, has also had approaches with the sector, speaking of virtual currencies such as the Venezuelan Petro.
In this way, in the crypto world there ends up an important gap represented by the risk rating companies. Therefore, it would not be strange if in the coming years new rating companies begin to emerge within the crypto market. Or that traditional companies start betting on the measurement of the risks associated with cryptocurrencies.
