Before investing in any financial asset or business, it’s fairly normal for you, as an investor, to understand the business model and other investment metrics so as to make informed decisions free of bias.
In cryptocurrency investments, the whitepaper can be likened to a business plan that contains all the necessary information investors need to know before putting in their hard-earned money.
Every day in the crypto space, one new project or another is released, each with a unique approach to solving problems with blockchain technology. This distinction can be found in the content of their whitepapers.
Indeed, having a whitepaper is a great approach to transparency and allowing investors to know what they are getting into; however, as an investor, you must know what to look out for in a whitepaper to determine if the project matches your investment goals.
In this article, we’ll outline a few important things you should look out for in a crypto project’s whitepaper before making investment decisions.
What is A Whitepaper?
A project whitepaper is a comprehensive document outlining the technical and economic aspects of a specific project. Whitepapers are not exclusive to crypto projects; several companies, non-profits, and other organizations release whitepapers to explain their products and goals to their audiences. This, in turn, serves as an investment guide for potential investors.
Whitepapers are called "white" because the white color indicates that the document is available to all. This means that it could be interpreted and accessed by the public without needing exclusive access.
For crypto projects, whitepapers are written by the cryptocurrency's development team or core members, typically containing an overview of the project’s goals, tokenomics, products, features, and information about the team.
Bitcoin, the very first cryptocurrency, had its whitepaper released by its creator, Satoshi Nakamoto, which has been the basis for several other cryptocurrencies created after it.
A crypto whitepaper aims to enable potential users, crypto investors, and other interested parties to gain a comprehensive understanding of the key details of the project.
In essence, it is a marketing tool used to persuade people to put their money into a specific project. Typically, a crypto project issues a whitepaper before it tries to raise funding. This is done to attract potential investors via private investments, ICOs, IEOs, or other fundraising techniques.
5 Things To Look Out For In Crypto’s Whitepaper
Specifically, a whitepaper should answer the following questions, among others:
- What is the project’s purpose?
- What problems does it solve?
- What blockchain technology is used?
- Who are the founders and core team behind the project?
All of these are further outlined below.
1. Problem Solving
A white paper should easily describe the problem a project is solving and the unique approaches it intends to use to solve it.
As an investor, you should be examining the “problem statement” and asking yourself if the project is solving a real problem or a problem significant enough to attract big-gun investors in light of a potential solution.
Many crypto projects usually try to “reinvent the wheel” by developing new solutions to already solved problems without significant differences in the end results. Such projects may not be worth it in the long run.
Typically, the problem statement of a crypto project is present in the first few pages or introductory section of the whitepaper. Reading this part carefully before skipping to other deeper details will help you understand the project’s aims, target market, and viability.
By understanding the problem the project aims to address, you can effectively evaluate its ability to solve it via its methods, usually described within the whitepaper.
2. Address the "how”
A white paper shouldn’t just be about problem-solving but also about how it intends to solve the problems it has identified. Ideally, a good whitepaper should provide details on how their solutions will outpace competitors, gain a community, and incentivize developers.
Here is where you can compare the project with other competitors who are trying to solve the same problem, and you can evaluate each one's strengths and weaknesses and the viability of each to determine which one seems better and more realistic.
A detailed roadmap, including timelines for each step of the process, is also something to look out for. Projects with a clear plan should have a defined timeline for each step of the way.
For example, if a project aims to solve blockchain scalability, you should investigate what makes its methods unique and if, indeed, it is viable enough to become a major player among top-rated blockchains.
You need to understand the consensus mechanism, its blockchain architecture, and how network nodes will be run.
A whitepaper that requires investment should clearly spell out its token economics, or tokenomics for short. This helps you to understand the project’s demand and supply dynamics and the factors that can affect it, all of which have direct influence over its value and potential for growth.
You must ask yourself the following:
- The token’s utility - does it actually have any utility or use case once the project is live?
- The supply schedule - how will it be distributed? Will excess tokens be burnt? Will there be airdrops? Will there be a private sale?
- Is it inflationary or deflationary?
- Will there be a lockup period once the crypto token is bought? If so, what is the vesting schedule?
- Will the token be listed on any CEXs and DEXs? When?
In one word, you must fully understand what drives the token’s valuation and how you can profit from it as an early investor.
4. Who Are The Team Behind and Core Members? What Are Their Motivations
It is important to check out the team behind a project - who they are, their past achievements, especially within crypto and blockchain technology, as well as the aspect to which they are looking to solve a problem.
It is important to see their individual resumes to be absolutely sure that they are authority figures in their respective fields and have the important experience required.
More importantly, there should be no conflict of interest between investors and stakeholders. There should be absolute transparency about everything, and ideally, the team should have their share of the tokens locked up for a period of time to show commitment to the project.
The stakeholders should be more concerned about the success of the project than making quick money from it; anything contrary to this could indicate a lack of dedication, which is a red flag.
5. Facts or Fables?
A whitepaper may contain everything outlined above and even more. However, it is not enough to have a comprehensive whitepaper; it is equally important to independently verify the information by always doing your own research.
It is unwise to blindly trust a whitepaper, as it is merely a proposal. Fact-check everything possible and ensure that there is enough research to back up the project, rather than mere opinions.
One of the best ways to understand a crypto project is by investing time to examine its whitepaper, which provides necessary information in order to know what you’re dealing with.
To put it simply, a crypto project’s whitepaper will tell you more about a project than an industry veteran would.
Even if it sounds too difficult to understand as a beginner, take some time to understand the project statement, and then take the time to research similar projects; comparing and contrasting will provide more context to each one.
Understanding a crypto project and the team behind it is a crucial step before investing your money in it, so do not take it lightly.
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