Have you ever bought a car just for fun, without researching its features, costs or even without test driving? Most probably not.
The same should apply to cryptocurrencies. There are hundreds of coins in the space, and choosing “The one” becomes a Hamlet scale dilemma. Thankfully there is a guide that can prevent traders from getting lost, keep the mind sharp and help trader’s to choose the best coin for them. The whitepaper.
Let’s take a look at how this key document behind each digital currency may help you to make the best investment decisions possible, and what exactly you should look for when reading a project’s WhitePaper.
What is a WhitePaper?
A whitepaper is a first and main gateway into a particular crypto project. It’s an official document from its creators that explains the value of the project, what problem it is looking to solve, and how.
A properly written whitepaper answers these questions together with technical specifications, market research, and risk analysis.
Usually, whitepapers contain the same key elements. Learning how to read them is of critical importance for your own safety. There are a lot of scam projects floating in the crypto space, waiting for easy money from unsuspecting users. A whitepaper can help you to understand if the project is serious, and a prospective candidate for you to invest in.
The Key elements: What to Look for When Reading WhitePaper
1. What Does the Project Do?
The critical section of the white paper reveals the main purpose and function of a particular project.
What is the project about? Does it aim to create a platform for other developers? Or Does it help to reward artists and authors? A transparent document must, and will, answer these questions.
White papers are the face of the project. Those solid, legitimate teams behind them do their best to create clear and understandable documents. If the explanations are vague, or hide behind a ton of technical jargon, treat this as a red flag that the project does not have a specific aim and probably has no real value or purpose.
2. What Problem Does It Aim to Solve?
To build on this, the crypto project must clearly explain why it has been created. What problem does it solve? And most importantly, is it a real problem, or a fabrication? It might sound crazy, but numerous projects are created just for the sake of creation. They solve problems that do not exist or are so niche that they affect only a handful of people.
Next, look for the answer as to why the problem is relevant now. Search for the broader situation or global trend that has generated the urgency to find a solution right now. Check the arguments carefully to understand the real scope of the problem. Do your research and use other resources if needed.
3. How Does This Project Solve the Problem?
When the problem is stated clearly, what should follow is the answer of HOW exactly the project aims to solve it. This section is typically more technical as it explains how the technology behind the project could help to achieve its primary goals.
This segment should also justify why exactly the project needs to be built on blockchain. Does creating an expensive decentralized technology really benefit the project? In what way? Not all solutions require blockchain. Some may only use it as a trendy technology to cover up a regular (or worse, irregular) business model.
4. Token Economics
Don’t be intimidated. This abracadabra of industry buzzwords explains what role tokens play in the business of a given project, and what their growth potential may be. This enables you to understand the future value of the token.
The more clearly defined utility features a token has, the more valuable it becomes. Many traders buy cryptos as an investment, hoping that they will increase in value. It’s usually best when the paper contains arguments that motivate them to hold tokens in their portfolio long-term. If there are no expectations related to the token, it will become a purely speculative asset, and users will drop it as soon as the price falls.
Another factor that is critical to the price of the token is the supply. Is it limited or infinite? Tokens with a finite supply are scarce, which eventually leads to price growth. Meanwhile, those with unlimited supply will eventually lose their value as new inflows enter the market.
Evaluate which part of all tokens belongs to the project founders and their team. How many funds are they willing to invest to further develop their project? Be careful of projects, whose teams (founders, advisors) hold more for themselves than they spend on project development.
Keep in mind which exchanges are listing the token. What are their trading volumes? The larger, and thus more liquid, the trading platforms, the easier it is to buy and sell tokens without huge price differences.
5. The Roadmap
In a nutshell, the roadmap is the summary of the project’s development. It reveals short and long-term plans on a timeline of when they can be expected to be achieved. This is an important feature which helps to monitor the evolution of projects, and thus enables one to set realistic expectations.
6. The Team
The final, crucial factor to consider is the people behind the project. Who are the founders, employees and advisors? What skills and experience do they bring to the table? Is it relevant to the project they are working on? What is their general reputation?
The crypto space is full of scammers who use fake “big names” and biographies to promote their projects. This is why it is always worth it to go the extra mile and check their LinkedIn and other social media profiles. How big is their following? How active is the community? A massive but passive following tends to indicate a fake account.
On The Flipside
- Since the whitepaper is the main document that helps future investors to make their decisions, it has become a marketing tool as well. This means some projects have a larger focus on promoting themselves, rather than on explaining the real problem, the technical details, etc.
- Spelling or even grammar mistakes should immediately be a red flag. The teams behind respectable crypto projects invest in their whitepapers, and would not usually allow such mistakes. If your gut instinct is that the whitepaper does not look professional, it’s better to trust yourself and look elsewhere as it is most like a hurriedly put together scam.