How does ARIA evaluate cryptocurrencies?

The cryptocurrency space is abundant in data, however, not all available data is adequate or appropriate to help the investor choose the right level of risk appropriate to their profile when selecting an investment. ARIA endeavors to combine both on-chain and off-chain data to provide investors with a truly global representation of risk that can be consumed at a glance, saving the investor hours upon hours of research.

With our objective being the logical and meaningful comparison of different cryptocurrency projects and their legitimacy as an investment asset, we’ve processed by taking a holistic approach, taking in a 360-degree global view of each evaluated project.

After factoring in base information such as the type of project (is it a DeFi project? a metaverse or gaming project? A meme coin?), the date of its creation, etc., we’ve split the metrics used into 5 groups:

• Tokenomics
• Adoption
• Risks
• Governance
• Financial Performance

💡 Note that all the data collected, treated, and processed by A.R.I.A. is publicly available and verifiable. We do not evaluate or incorporate considerations of private or restricted information on rated projects.

This was a conscious decision in the development process of our Ratings System in order to align with our value of transparency, as well as to protect both the integrity of A.R.I.A. Ratings and the privacy of evaluated projects.

(See more: What cryptocurrencies does ARIA rate)

Overall, this methodology has been meticulously designed to scrutinize digital assets from every quantifiable angle, while also collecting qualitative valuable insight and attempting to eliminate any bias (e.g. celebrity backing), to enable investors to make more informed decisions in the rapidly changing world of crypto investment. The detail, depth, and precision of this methodology, in addition to its automated nature within ARIA Ratings’ algorithms, sets A.R.I.A. apart as the go-to platform for crypto ratings and investment analysis.

It is critical to note that ARIA aims only at rating digital assets and legitimate investment assets and does not in any circumstance provide any investment advice. More Information in our Term of Service.

Read more on each category in our articles below.

I. Tokenomics

A holistic evaluation of a cryptocurrency project cannot start without looking at its internal economics and the functioning of the digital asset, in other words, its Tokenomics.

ARIA’s assessment is based on two primary axes:

1. Information of its supply model — whether it is inflationary or deflationary, and more specifically its level of decentralization, with the fundamental assumption borrowed from the Web 3.0 industry’s DNA that the more decentralized a token’s supply, the more legitimate its project. This first axe will be looking at this level of decentralization primarily by taking into supply metrics (i.e. a coin’s circulating supply, total supply, and maximum supply, if there is one).
2. Ownership incentive — by evaluating the incentives to own the coin/token designed within its internal ecosystem, we consider the framework for support from investors to buy, use and/or hold the cryptocurrency. This second axe evaluates investor incentive by looking at a token’s utility and usefulness. We’ve divided these into 4 broad types of utility/incentive:
   1. Transaction Fees:
      ARIA considers whether the asset is required to pay network gas fees. This would typically be the case for any native blockchain coins.
   2. Native Staking:
      While there are multiple forms of “staking”, ARIA considers specifically whether the cryptocurrency offers native passive revenues and the extent of this potential revenue. The greater the revenue offers, the greater the incentive to buy and hold this coin. Note that the traditional concept of “higher staking return, higher risk taken” is incorporated into staking consideration within the methodology across not only its Tokenomics, but Risks and Financial Performance metric groups. (See more: Risks, Financial Performance)
   3. Native Governance:
      Within the Tokenomics framework, native governance refers specifically to whether buying and/or holding the asset in question gives its owner any rights or governing function in the crypto’s native ecosystem. Note this section’s Native Governance is different from the metrics explored in the Governance metric group (See more: Governance).
   4. Service Access:
      In addition to the previous three types of utility, some cryptocurrencies additionally grant their holders additional functions designed to be activated in their internal ecosystem. ARIA thus further considers whether the cryptocurrency is a “utility token”, defined as a token that has a specific function that is not payments of transaction fees, staking returns, or native governance rights. (Example: gaming tokens).

II. Adoption 

Although cryptocurrencies have a more significant (and growing) place in online news and media today than they held in the past, as a market it remains a highly technical and complex field, still populated primarily by technology experts, financiers, speculators, and the otherwise interested or curious investor. As a result, there remains a significant entry barrier to this market blocking it from truly becoming “mainstream” as of yet, whether as an investment, trading, or even gambling field).

Accordingly, ARIA Ratings incorporate consideration for the level of “mainstream” adoption in the Adoption metrics group, thus assessing each digital asset’s level of endorsement by both the Web 3.0 and Web 2.0/traditional/mainstream communities. The aim is to highlight the token’s legitimacy and support through the quality and influence of its active users, the level of interest in its network, the size of its audience, and its transaction accessibility level.

To do so, ARIA Ratings assesses Adoption along the following three axes:

1. Level of liquidity through centralized exchange listings: 
   For each digital asset assessed, the Ratings will look at how many exchanges is it listed on, incorporating consideration for the quality of the exchange based on its overall trading volumes, the token’s trading volumes, and level of liquidity available.
2. Coin/Token Trend: 
   The trend which evaluates the strength of community engagement, while also acting as a measure of investor sentiment, taking into account shorter and longer-term trading volumes. The stronger the community engagement, the greater the statistical likelihood the digital asset will face and survive possible downtrends and future challenges.
3. Integrations & Partnerships with medium and large corporations and/or entities, particularly in the non-Web 3.0 space. 
   This axis measures the level of integration of a particular digital asset by traditional companies, suggesting a wider mainstream knowledge and acceptance of the project, taking into consideration several factors of the partnering entity including the size of the company, its sector, and sector relevance to the project, and its brand’s level of influence. In essence, this axis assesses the legitimacy of a Web 3.0 project in the traditional world by its degree of use and/or interest by well-established companies, which may have a significant impact on the project’s growth, brand image, and mainstream adoption.

III. Risks

The crypto market and its many associated risks have been well-known and widely publicized since the asset’s early days. The number of scams, security breaches, exploits, and, more recently, legal action taken against projects — is all a list of potential risks to the investor and long enough to merit its dedicated metrics group for consideration in ARIA’s Ratings methodology.

We consider this metrics group to be of fundamental importance to the evaluation of a cryptocurrency’s legitimacy as an investment asset. Unlike other investment assets, cryptocurrency projects have a significantly higher likelihood of crashing and/or disappearing. Accordingly, ARIA measures the risk along two broad axes that would impact the investor:

1. Security Risk: 
   A.R.I.A. is proud to be partnered with Certik, Web 3.0’s leading smart contract auditor and pioneer blockchain security firm, to power our Security Risk axis with their accurate and specialized data.
   The risk of security specifically refers to the consideration of the cryptocurrency’s code, whether it has been audited, and its history of hack9s)/exploit(s), if any have occurred. The objective of this axis is to highlight a cryptocurrency project’s technical vulnerabilities or security strengths, which may be beyond the capacity of the average investor not well-versed in code and blockchain security matters to assess.
2. Litigation Risk: 
   In a continuously evolving and sensitive regulatory environment, the consideration of law and litigation is crucial to a digital asset’s viability as an investment asset. Therefore, ARIA incorporates regulatory consideration by identifying any ongoing legal batters an assessed cryptocurrency project is engaged or involved in and evaluates it accordingly. It is important to note that ARIA does not incorporate consideration of rumors of upcoming litigation and does not engage in any speculation as to the outcome of the legal battle itself. The consideration is purely factual as to the existence and/or persistence of a legal conflict that may impact the asset from an investment perspective.

ARIA’s assessment of the risk posed by litigation is further influenced by the country in which such litigation has been initiated, is ongoing, and/or where the regulatory body is prosecuting, in addition to the potential impact of a complete ban of digital assets in the country. Accordingly, an ongoing litigation in Country A which has a significantly more important place in the crypto market than in Country B would have a higher impact on the risk measurement. The evaluation of a country’s significance follows a proprietarily and dynamic methodology, which takes into account multiple statistics on the country itself including its GDP, the size of its population, the estimated percentage of people owning cryptocurrencies amongst its population, the number of Bitcoin nodes, the number of blockchain jobs, and the number of ATMs in the country.

IV. Governance

When assessing the governance of a cryptocurrency project and following the fundamental DNA of the Web 3.0 space, we based ARIA’s evaluation on the assumption that the greater the level of decentralization in a project’s governance and decision-making, the more trustworthy and unbiased the outcomes, granting the crypto project greater legitimacy as an investment asset.

The following axes form the basis of the governance evaluation:

1. Presence of governance mechanisms: 
   This measure registers whether the coin/token has any native governance embedded in and/or if a Decentralised Autonomous Organization (DAO) has been established. Note that this consideration of governance differs from the utility governance metrics assessed in the Tokenomics group. While in Tokenomics the consideration lay primarily around whether the coin/token itself provided a utility/function in relation to the governance of the project, here ARIA focuses specifically on the type of governance built in (if any) that leads to decision-making around the project’s development.
2. Supply Ownership Concentration: 
   Investors should always be wary of whale movements in the market as these can have a significant impact on your portfolio holdings’ value. Therefore, a key metric evaluated by ARIA is the level of democratization of the supply, or otherwise ownership concentration of the supply amongst a few select rich wallets. A project may have strong fundamentals across all categories, but if its owners/developers have kept a large portion of the total available supply, the investor may be exposed to the risk of a whale movement that leads to their asset’s market crashing and the investor’s holdings plummeting into a significant loss. Accordingly, ARIA incorporates into its Ratings an estimation of the portion of the supply held by the assessed currency’s rich and incorporates that into its governance score.

Note that ARIA does not speculate as to the likelihood of whale movements on-chain. Whether it be by choice of the owner or as a result of a security breach, if the rich wallet starts selling its large supply, leading to a market crash in the particular asset, ARIA only acknowledges the risk of this scenario and not its statistical likelihood of occurring. We believe investors should be aware of all existing risks to their holdings, and then have the freedom to choose to take that risk or not. 3. Investor Backing in Early Stages While a project does not necessarily require known investors backing it to make it legitimate, ARIA has implemented an additional metric providing “bonus” points to projects backed by quality Venture Capitalists (VC). However, to eliminate any bias due to the trending nature of a project, these points are only allocated on investor backing at the Seed Round, which allows for better identification of potential gem projects.

The reasoning for this addition is that the Seed Round, as an earlier stage is when the fewest information is available due to the youth of the project. With the base assumption that quality VC investors engage in proper due diligence before investing in any project at this stage, legitimacy points are granted to a digital asset that has garnered backing from esteemed venture capitalists so early in its development, which is set to support, and possibly accelerate, their adoption. The quality of VCs backing a project is based on multiple factors including their AUM, presence/influence/reputation in the Web 3.0 space, and past performance.

V. Performance

Given A.R.I.A.’s core objective of providing cryptocurrency investors with a benchmark risk standard, no such assessment of any digital asset could be complete without taking into account its adjusted financial performance.

Thus, the financial metric group within the ARIA Ratings Methodology evaluates quantitative key performance indicators of the assessed crypto’s volatility and market behavior, which directly translates to the asset’s legitimacy and stability as an investment.

The evaluated metrics include:

1. Annualized Volatility: 
   The annualized volatility measures the amount of fluctuations or variability in an investment’s returns over one year. A higher annualized volatility suggests the asset experiences larger price swings, indicating higher fluctuations in the price. It is essential to consider volatility, especially when evaluating cryptocurrencies because while higher volatility may lead to higher returns, it can also generate higher losses for the investor. As some cryptocurrencies in ARIA’s scope may have been launched less than one year ago, and thus have less than 365 days of market data, their existing track record will be taken into account.
2. Maximum Drawdown: 
   The maximum drawdown is a measure of the largest percentage drop in the value of an investment from its highest to lowest point. This metric provides a tangible measure of the historical maximum move that occurred during a specific time, highlighting the downside risk of the investment asset in question.
3. The Sortino Ratio: 
   The Sortino ratio is a risk-adjusted performance metric that focuses on the risk/return profile of an investment asset in a downside period. It evaluates how well the investment performs in its negative moments. The higher the sortino ratio, the better the risk-adjusted performance is.
4. Beta v. Benchmark: 
   The beta is a measure indicating the sensitivity of an investment’s returns in comparison to a set benchmark. The benchmark selected is chosen to reflect overall market movements. The benchmark used in this case is Bitcoin, as the cryptocurrency with the largest market dominance, capitalization, time since creation and widespread adoption. In this context, the “Beta v. Bitcoin” metric assesses how much a given cryptocurrency’s returns tend to move versus Bitcoin’s price movements.
5. Hit Ratio v. Benchmark: 
   The Hit Rations v. benchmark compares the number of similar return signs. It helps in tracing the closeness of an asset’s behavior against a defined benchmark. It is also a way to assess discrepancies in a benchmark investment strategy. The benchmark used in this case is Bitcoin, as the cryptocurrency with the largest market dominance, capitalization, time since its creation, and widespread adoption. The higher the hit ratio, the better the score in the case of a benchmarked view.

These performance indicators are internally converted to exploitable, interpretable scores. They are essential tools for both investors and analysts to assess the risk and performance of their investments, hence their inclusion in the Ratings final grade. Understanding these metrics can help you as an investor make more informed decisions and manage your investments under an exhaustive assessment of digital assets.

💡 For more details or to view the breakdown of each of these financial statistics per assessed cryptocurrency, we invite you to check out ARIA’s Data Harbour — your statistical hub for comprehensive cryptocurrency analysis.

While some investors may choose to invest in higher volatility projects, this higher risk appetite does not translate to all investors. Please only invest in alignment with your risk appetite. ARIA is here to guide and assist you in this process.

Metadata Adjustments

As mentioned in How does ARIA evaluate cryptocurrencies?, outside of the five metric groups, ARIA collects additional information on the assessed projects to adjust the final score into a meaningful comparison across different cryptocurrency projects.

Specifically, ARIA looks at the cryptocurrency’s sector of activity (e.g. Blockchain, Gaming, Metaverse, DeFi, etc…) and their time since inception (launch date). We take these as adjustment categories, which have a key influence on the final calculated ratings.

These adjustments are based on the fundamental assumption that two projects of theoretical equal measure across all metrics but that are in different sectors (e.g. a meme coin vs. a DeFi project) or that have been in circulation for different amounts of times (e.g. 10 years vs. 9 months) cannot have the same final risk score when considering legitimacy or especially the projected survival of the project.

1. Sector Adjustment — these values impact the importance attributed to each of the five metric groups in view of the project’s long-term success potential.
2. Time Since Inception — digital assets remain a young investment asset class, and thus their legitimacy and level of risk, particularly when considered for longer-term investment, is strongly influenced by the amount of time they’ve survived since their launch. This can be especially relevant for cryptocurrencies on the higher end of the speculative spectrum. Given the multiple upward and downward cycles that have occurred in the crypto market since Bitcoin’s first launch, this adjustment is also a measure of the proven resilience of an assessed coin/token, through historical data.
   ARIA bases its adjustment of the time factor on US Bureau of Labor statistics on a startup’s survival probabilities based on its age.

Important Information

It is crucial to note that ARIA Ratings DO NOT provide any speculation or prediction into future price movements. A highly rated coin/token does not signify its value will go higher, and similarly, a poorly rated coin/token does not signify it will crash. Rather it is a representation of the holistic risk taken by the investor should they choose to buy and/or hold it in their portfolio, in a standardized and comparable format.

An investor looking for higher returns may choose to invest in a poorly rated coin/token if their risk appetite is higher. This is solely dependent on the investor and ARIA Ratings should be used as a reference point or informative indicator to the investor to complete their research and analysis. It is up to the investor to decide on what constitutes adequate and acceptable risk to them.