[Idea] Investment Rating Service

[isis]

Would anyone be interested in a D&B, Moody's or S&P style rating system for investments in the bitcoin securities market?

I'm thinking about an independent rating service that tracks the securities traded on GLBSE, Cryptostocks and any others.

Since the market is so young and all investments are highly speculative to begin with it might be difficult but I think it would be a totally worthwhile endeavor.

I'm soliciting feedback on this idea right now since it's not fully formed, but it feels like the kernel of a good idea.

Let me know what you think!

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[novusordo]

Who would rate the investments, and upon what criteria?

[justusranvier]

If you think there's a market for this service start a competing exchange that performs a preliminary audit prior to listing as well as enforcing requirements for transparency and good accounting practices. Charge more for your service in order to cover the cost of the audits. If people value the additional scrutiny then they'll be willing to pay for it.

[bitcoinbear]

If you think there's a market for this service start a competing exchange that performs a preliminary audit prior to listing as well as enforcing requirements for transparency and good accounting practices. Charge more for your service in order to cover the cost of the audits. If people value the additional scrutiny then they'll be willing to pay for it.

Would it be unbiased if the people paying for the rating are the ones getting the rating? But I am not sure how else to keep it going, unless you can get enough donations?

The idea of a rating service has been suggested many times before, people clearly want one, but there has just been no follow through before. I think a few of the investment funds (MOVETO.FUND and BLUECHIP, EG) could use such a rating to screen possible investments, and it would be good for the casual investors too.

You would also need a quallified accountant to actually do the auditing. Do all the companies on the GLBSE even follow the same (or any) accounting practices?

[isis]

So I've spent the last few hours talking to a client of mine and I think we've hit upon an excellent idea for how this could work.

The biggest problem with rating agencies is trust.  Trust has to be earned, but there is a conflict of interest in having a company pay a rating agency to be rated.  However the effort that goes into actually performing a rating is significant and it doesn't make sense financially for someone considering buying a 1BTC stock to put up significant money to request a rating.

So here are our thoughts.  

We identify 10 primary criteria that are important to an investor and that can be used as indicators of the health and general well being of a security.

There would be 5 objective criteria and 5 subjective criteria.
Objective criteria would provable factual items such as time in business, debt/income ratio, dividend history, P/E ratio etc.
Subjective criteria are items such as an evaluation of management skills, track record of the founders/leaders, likely hood of success for their business plan etc.

Of course the 10 criteria would have be adjusted for each class of security, stock, bond, fund.

A company or an individual would donate BTC to a rating fund on a "per security basis", donors would be kept anonymous.
When that fund reaches 100 BTC the rating process would begin.

During the rating process all the relevant documents would be gathered by a randomly chosen community member (similar to a moderator).  The mod would be paid 5 BTC for this task.

Once the relevant documents are gathered they are uploaded to the site and 5 separate randomly selected "expert" raters rate the company based on 4 of the 10 criteria.  Each expert rater would earn a fixed fee of 3BTC per criteria for a total of 12 BTC for completing the task.  

To prevent any conflict of interest.  No one would be allowed to be both a moderator and an expert on the same security, however a moderator will ALWAYS be chosen randomly from the pool of experts.

To become an "expert" you would need to earn trust and reputation by "rating the rating" of the offering.
  
Doing so would start you on a sliding fee scale starting at 0.01 BTC and gaining at a rate of 0.001 BTC per criteria.  
Once you've reached the max of 3 BTC you are considered an "expert".  (Yes that's a lot of ratings and will take time, this is intentional).

General members of the site wouldn't be allowed to rate a security or any of it's criteria directly, but merely agree/disagree with a rating.  There would be an agree/disagree button next to each criteria (which is a composite of the scores given by the "experts") and general members would earn 0.001BTC for clicking agree/disagree (one time vote).

To prevent bots, spamming and sock puppets, any time a rating is agreed or disagreed with, a sensible comment must be made and any community member could mod it up or down (with a reason selected, similar to how slashdot works).  After 2 weeks or 100 mods, the comment is considered "solid" and if you are modded more up than down then you receive pay for all your efforts that occurred during the time-frame.

The rating would be an average of the scores given by each "expert" with additional weight given to the community consensus.
With a final "composite" score calculated based the average of all scores and the amount of activity and interest.

The final bit of this puzzle is that once the rating fund is depleted to less than 1 BTC, the composite rating is frozen for one month and then loses 1 percent per day.  Dropping to 0 after 100 days of no activity.  This is intended as a measure of interest and is important because interest and sentiment correlate strongly to liquidity.  To keep the composite rating from dropping, a donation should be made, to the rating fund for the company, but it won't raise the composite beyond the initial rating.  When the fund reaches 100 BTC again the rating process will start again for the company.  The goal being to keep ratings fresh.

It's a bit complex and I hope I've stated everything clearly.  Let me know what you think so far.

[SgtSpike]

In my opinion, an investment rating service wouldn't be all that useful for this community.  Rating services are typically targeted at the masses to give them a "quick and dirty" of potential investments.  Some people here might be interested in that, but what would be much more useful is...

A proper auditing service.  A service that verifies the names, social security numbers, tax identification numbers, addresses, phone numbers, domain whois, IP addresses, relatives, etc of anyone who wishes to conduct business with the auditing service's stamp of approval.  A service that verifies that the business actually holds the number of Bitcoins it claims it holds.  A service that verifies that the business's accounting practices are at least in as much accordance with GAAP as is possible with Bitcoin.  A service that ensures the owner isn't just going to up-and-run without being extremely traceable.  A service that will, literally, fly to meet business people face to face for these auditing services, and make notes of EVERYTHING noticed.

Now THAT would be a service worth paying for, both on a subscription basis from the investor point of view, and on a fee basis from the business point of view of anyone who wishes to conduct a verifiably legitimate Bitcoin business.

Is it worth setting up a new auditing service focused solely on Bitcoin-based businesses, instead of using existing auditing resources?  Perhaps, as existing auditing services likely wouldn't know the first thing about how to check for proper Bitcoin accountability.  But that's not to say they can't learn, and maybe one of them will see the potential market, and make the effort to do so.

ANYWAY, go for it.  A rating service certainly wouldn't be a bad thing.

[justusranvier]

Would it be unbiased if the people paying for the rating are the ones getting the rating? But I am not sure how else to keep it going, unless you can get enough donations?

I think to get the incentives right the traders should pay for the auditing, not the companies being rated.

[isis]

In my opinion, an investment rating service wouldn't be all that useful for this community.  Rating services are typically targeted at the masses to give them a "quick and dirty" of potential investments.  Some people here might be interested in that, but what would be much more useful is...

A proper auditing service.  A service that verifies the names, social security numbers, tax identification numbers, addresses, phone numbers, domain whois, IP addresses, relatives, etc of anyone who wishes to conduct business with the auditing service's stamp of approval.  A service that verifies that the business actually holds the number of Bitcoins it claims it holds.  A service that verifies that the business's accounting practices are at least in as much accordance with GAAP as is possible with Bitcoin.  A service that ensures the owner isn't just going to up-and-run without being extremely traceable.  A service that will, literally, fly to meet business people face to face for these auditing services, and make notes of EVERYTHING noticed.

Now THAT would be a service worth paying for, both on a subscription basis from the investor point of view, and on a fee basis from the business point of view of anyone who wishes to conduct a verifiably legitimate Bitcoin business.

Is it worth setting up a new auditing service focused solely on Bitcoin-based businesses, instead of using existing auditing resources?  Perhaps, as existing auditing services likely wouldn't know the first thing about how to check for proper Bitcoin accountability.  But that's not to say they can't learn, and maybe one of them will see the potential market, and make the effort to do so.

ANYWAY, go for it.  A rating service certainly wouldn't be a bad thing.

Auditing wouldn't be a bad idea, the problem is getting the company to co-operate with an auditor.  I would put "independently audited financials" as one of the major "objective" criteria.  It's requirement to go public anyways.

[SgtSpike]

In my opinion, an investment rating service wouldn't be all that useful for this community.  Rating services are typically targeted at the masses to give them a "quick and dirty" of potential investments.  Some people here might be interested in that, but what would be much more useful is...

A proper auditing service.  A service that verifies the names, social security numbers, tax identification numbers, addresses, phone numbers, domain whois, IP addresses, relatives, etc of anyone who wishes to conduct business with the auditing service's stamp of approval.  A service that verifies that the business actually holds the number of Bitcoins it claims it holds.  A service that verifies that the business's accounting practices are at least in as much accordance with GAAP as is possible with Bitcoin.  A service that ensures the owner isn't just going to up-and-run without being extremely traceable.  A service that will, literally, fly to meet business people face to face for these auditing services, and make notes of EVERYTHING noticed.

Now THAT would be a service worth paying for, both on a subscription basis from the investor point of view, and on a fee basis from the business point of view of anyone who wishes to conduct a verifiably legitimate Bitcoin business.

Is it worth setting up a new auditing service focused solely on Bitcoin-based businesses, instead of using existing auditing resources?  Perhaps, as existing auditing services likely wouldn't know the first thing about how to check for proper Bitcoin accountability.  But that's not to say they can't learn, and maybe one of them will see the potential market, and make the effort to do so.

ANYWAY, go for it.  A rating service certainly wouldn't be a bad thing.

Auditing wouldn't be a bad idea, the problem is getting the company to co-operate with an auditor.  I would put "independently audited financials" as one of the major "objective" criteria.  It's requirement to go public anyways.

Well, that's exactly it.  Having the auditing service's "seal of approval" would be a major competitive advantage in this world of scams and trickery.  No Bitcoin business can currently be 100% trusted, because none of them are independently audited.  As soon as one business jumped onboard the audit train, people would flock to them just because they are then much more trustable than any of their competition.  Thus, businesses would have incentive to cooperate with the auditors, so that they may draw customers towards their services.

[novusordo]

Having this as a subscription-based service that the users pay for could be the right way to go. A business asks for a rating, and you rate them for a smallish fee. The fee wouldn't be a lot, just enough to discourage spam, etc. The fee shouldn't be enough to cause a conflict of interest. The real profit would come from charging subscribers per month for your ratings of the companies. Of course, it would need to be worth paying for!

[Seal]

So say for example Moodys rates mortgage backed loans as AAA because they appear to be good investments. The algorithms used to calculate their risk have been used by economists for decades. In this system, the bank pays the rating agency its fee, the agency runs its numbers again and everybody seems happy.

After the product gets its AAA rating, trillions of $$$ are invested in these products as investors assume they are safe.

This is a system whereby only the cleverest people in the industry are allowed to release ratings. In reality they know nothing about the products they are rating.

... hang on a second... de ja vu anyone?



These companys all operate on a basis where transparency, auditing and good accounting practices all exist. However this doesn't mean they wont ever make mistakes. If the hundreds of brainy people that work at these institutions cannot get it right, I'd be reluctant to trust the judgement of a handful of individuals here.