Valuing a cryptocurrency is difficult because there is less information available. Generally, cryptocurrencies have smaller market caps, warrant less attention, and have no legal obligations to fully disclose all of their activities.
The white paper is sometimes the only formal document made available to potential investors. The white paper for a cryptocurrency is an informational document that is issued by the token creators which outlines the problem that the creator is attempting to tackle, a description of the solution, technical details regarding the token issuance, the team, a roadmap, and usually, depending on the offering, how the raised capital will be used.
Satoshi Nakamoto, the creator of Bitcoin, released his white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” back in August 2008, and for a long-time it was the only source of information available to early adopters.
Diving deep into a white paper can yield incredible insight into the potential future of any venture.
Ideas are cheap, but execution and managements’ ability to bring the product to market must be put into question. Be wary of projects with a social agenda that could lead to misalignment of interests amidst founders and those involved with the cryptocurrency. Plenty of social vendettas have been known to cripple a project midway through its development cycle. Lastly, don’t disregard the achievements that might be presented in a whitepaper, but do take them with a grain of salt. Afterall, purported claims only get you so far – but evidence speaks volumes.
First of all, it is important to take into consideration the problem-solution dynamic and considering whether there is a demand for a solution to be satisfied. Secondly, as with any project; taking into consideration the management team and those closely involved with the project is crucial.
It takes a very careful eye and a patient composure to sift through the details of a whitepaper. In what many describe as a “speculative mania” of cryptocurrency offerings, issuers have tried and tested many ways of disseminating information both effectively and purposefully-poorly to generate hype, and we are thankful to know where an investor should pay extra attention.
Consider what others value when analysing a white paper, look in the same direction, but look even closer to see if they have missed something. There are plenty of templates for white paper due diligence available online, and it’s worth exploring what they have in common.
Never lose track of what you’re reading, and especially why someone wrote what you’re reading.
A whitepaper serves as the front line for cryptocurrency developers in attracting interest from prospective investors, speculators, and users – alike. It must be detailed. The first tell-tale sign of a poor whitepaper – and possibly poor cryptocurrency initiative – is a short paper. In a world of keep-it-simple-stupid, this is where you want to see great length and effort. Generally, don’t waste your time with a white paper less than 15 pages in length. (Footnote: Satoshi Nakamoto’s whitepaper was famously short and is an exception to this rule.)
The white paper is also the perfect place for creators to get technical and describe in length their protocol, logical architecture, and a feasible development roadmap – make sure to stress the feasibility.
Consider whether the roadmap is overly reliant on crunch development cycles and whether it’s comparable with any other projects. Many cryptocurrency projects have risen dramatically on false prospects of growth due to over-promising only to later crash spectacularly.
It definitely helps to understand the underlying technology pushing the venture and the value investors aim to invest in what they know. This doesn’t mean you have to be a computer science major to start investing in cryptocurrency, but thoroughly understanding the utility of the project and the problem/solution dynamic is imperative to success.
This is true for even major cryptocurrency markets such as Bitcoin, Ethereum, or Ripple, but even more true for ICOs. Still, if you’re just starting out in the cryptocurrency investment world – reading the whitepaper of high market cap cryptocurrency will give you further insight into what external factors may influence price action.
If you’re interested in undertaking some crypto micro-cap investments you should get comfortable with white papers and even consider placing yourself in the shoes of a developer and asking “what would I want to see in a whitepaper” and reviewing a guide for writing one.
Trading for the sake of trading is a recipe for disaster, especially in cryptocurrency. Always have a plan, and make sure you understand what you’re trading and why you’re trading. The white paper is the first step in building a cryptocurrency trading strategy.
Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.