How to Read & Analyze a Crypto Coin Whitepaper
What is a Whitepaper?
Before learning about cryptocurrency, I had never read a whitepaper. Now I read one to two per week. It’s the least I can do when trying to decide whether to invest in a new crypto project. Although there really aren’t any rules on what a white paper should include, a good white paper will provide details about the utility of the project, technical specifications, evidence-based market research, risk analysis, security procedures, and so forth. Hopefully, it’s written in a way that makes it easy for the reader to understand the value the project holds and what problem it is trying to solve.
Essentially you are looking to answer these fundamental questions:
- Is the project legitimate?
- Is the team experienced enough that it can deliver?
- Is there a market for the proposed product or service?
- Who are the competitors? What function will the token have?
- Could this token be replaced by an existing cryptocurrency?
Why Read a Whitepaper?
While most folks these days read cryptocurrency whitepapers to decide whether to invest in the project’s Initial Coin Offering (ICO), there are several other reasons to find a cozy chair and spend an hour reviewing the merits of a new project. Maybe you’re just interested in the project and what to learn more. Maybe you want to invest after the ICO has already taken place. Or many you want to contribute to the project’s open-source code or even get hired by the team. Regardless of the reason, reading the whitepaper is a great place to start, and its table stakes for getting investors, businesspeople, and developers interested in the idea.
Elements of a White Paper
So what are the elements of a good white paper? At a minimum, the white paper should cover the following topics:
1. What does the project do?
This is pretty straightforward — in reading the white paper you should be able to figure out the exact function or purpose of the project. What does the technology actually do? Does it create a new cryptocurrency? Does it create a decentralized travel agency? Or does it create a platform where buyers and sellers can exchange real estate? If you can’t figure out what the project does right away, chances are the idea is not fully baked or the white paper is not well-written.
2. Why is this project being developed?
The second element the white paper should address is WHY the project is being developed. What problem is the project trying to solve? What is the scope of this problem? And who does it impact?
The WaBi white paper, for example, does a great job of addressing the problem it’s trying to solve — it is trying to prevent counterfeiting in China, which “claims thousands of lives and costs billions of dollars.”
3. How Will These Issues Be Solved?
For many people, this is where it can get hairy. You understand the problem and why it should be solved, but you get caught up in the HOW. This happens to the best of us — especially those of us without a technical background. Sludge through this part of the white paper if you must and then look for other resources, such as articles and videos, to help you understand the tech and why it is or is not viable.
To the extent that you’re able to understand the project’s technical aspects, you should consider them critically. If the project incorporates a blockchain, is it required? Is it worth going through the expense of creating a decentralized blockchain when a modest web app with a centralized database will do? Does decentralization ultimately benefit the project’s purpose? Food for thought.
4. Who Is On the Team?
The next critical element to understand is who is leading the project. Who is on the team? What is their experience? How long have they been working on relevant or related projects? Do they have the experience to execute their grand plan?
Do not underestimate the importance of a vibrant and creative team. A great team can turn a crappy idea into a great one. It’s called pivoting. Conversely, a weak team can run a great idea into the ground. Make sure you research your team members — look them up on LinkedIn and Google their names individually. You would be surprised at the number of scams projects pull with their team members. Look for all-stars and nothing less.
5. When Will Milestones Be Completed?
First of all, if the white paper does not include a roadmap, that’s a bad sign. At a minimum, the white paper should include the project’s progress to date; if there hasn’t been any progress, then you’re reading about an idea and not a real business.
A bona fide roadmap will include milestones for the next 12 to 18 months. Typical project milestones include the exchange launch, the test-net launch, and the main-net launch. Think critically about the milestones. Are they realistic? Are they too long or short? If you’re an investor, when will you be able to realize a profit, and does that timeline work for you?
6. What Are the Tokenomics and How Will Funds Be Used?
Lastly, if you’re reading a whitepaper for a future ICO, you will want to analyze the “tokenomics” of the project — the economics related to how tokens will be created, how many will be issued, at what price, and what they will be used for. Here are few issues to consider:
What is the hard cap for the project? What is the maximum amount of money the project will raise? Consider that amounts for $50 million are very high. On the flip side, raised amounts under $5 million may be too small for the project to succeed.
What is the cap for individual investors? Can some wealthy investors control the project? If so then others will be beholden to their decisions when they sell.
Are pre-sale bonuses being offered? This is a tactic used to attract whales. A 30-40% bonus is probably reasonable for most projects. That said, if the bonus created too large of a gap between the lowest-paid price per token and the highest during ICO, this could result in the early dumping of the token, IF presale tokens are not locked for 3-6 months after being listed on an exchange.
And what about the token supply? How many tokens will be issued? And what will happen to unsold crowdsale tokens? Will they be:
- Burned — permanently destroyed, which reduces the total supply?
- Kept by the company?
- Distributed in a certain way?
Each option can impact the total or circulating supply massively, so it is important to be aware of the project’s plan for unsold tokens.
Token value and market cap
At what price does the token value have to reach in order for you to realize an appropriate return on your investment? How does this price compare to the potential market cap of the project based on its industry? Let’s say a reasonable market cap for a project in the same industry is $50 million. But in order for the token to reach a $10.00 valuation, the market cap of your project would have to reach $100 million based on the total or circulating token supply. Comparing the two projects suggests that a $5.00 valuation may be more reasonable. How would this relate to the price you paid for the token?
Use of funds
How will the funds be used? How much of the money raised will be allocated for:
- Product development
- Marketing expenses
- Operational expenses
- Strategic partnerships
- Legal and compliance fees
- Bonuses for founders and developers
Be sure that all of these metrics are clearly stated and justified in the white paper. If they are not, then be sure and bring them up to the community managers in the group’s Telegram or Slack channels. Chances are if you have these concerns other investors do, too.
By now you should have an idea of red flags in a white paper. In addition to some of the points already mentioned, you’ll want to identify poorly written white papers with grammar or spelling mistakes. Consider that if the project can’t get these details right that they do sloppy work as a whole. And always check for plagiarism in the whitepaper; it indicates a high likelihood that the project is a scam.
Moreover, is the white paper thorough? Does it answer all of your questions or does it leave too many unanswered? And does it look more like a marketing pamphlet instead of a mostly technical and business document?
Beyond the White Paper
While the points highlighted here are a great place to start, eventually you will have to develop your own feel for the viability and potential of the project. Yes, this means using your own experience and listening to your gut. What about the project resonates with you? What about the idea strikes your fancy? Do you really think the team can pull it off? Zoom out, look at the big picture and make a decision based on your own instinct.
If you don’t have a great feel for this kind of thing, then start reading more white papers. And then read comments from other investors and experts about the viability of those projects. With enough exposure and practice, you can develop analytical skills here and make great investing decisions.
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