article by CryptoJelleNL
Most crypto traders use technical analysis to make informed decisions, but a smaller group of crypto heads almost wholly disregards the charts and focuses on fundamentals instead. They learn everything there is to know about a project and decide if they want to invest in it or not.
In today's episode, we discuss one of the key tools in this process: the crypto whitepaper. Read on to learn what they are, how to read and analyze them, and things to look out for in a whitepaper.
What is a Crypto Whitepaper?
A whitepaper is a research publication where the author discusses a problem, and then presents their solution to the problem. It helps the reader understand the issue the author is trying to solve and then aims to sell the reader on the solution proposed in the whitepaper.
Historically, politicians used whitepapers to test public response to certain policy ideas before officially introducing it as law. Over time, whitepapers become a marketing tool used to promote new products or technologies.
Modern crypto whitepapers work similarly, aimed at marketing the project or raising funds for its development. The Bitcoin whitepaper is an exception, which was written to inform about the technological breakthrough of peer-to-peer electronic cash. Generally speaking, the simpler a whitepaper is to understand, and the flashier it looks, the more marketing-oriented it is.
As a rule of thumb, any crypto whitepaper aims to answer three questions:
- What is the problem the project is looking to solve?
- How does the project solve the problem?
- What value is created by solving the problem?
A strong whitepaper answers these questions, and provides evidence for the claims made in the whitepaper, using technical information about the project, market research, risk analyses, and other relevant information.
Why read a Crypto Whitepaper?
During a bull market, new crypto projects are pitched and released in rapid succession. Finding the projects that have potential is like finding a needle in a haystack, but knowing how to read a whitepaper makes it a lot easier.
Seasoned investors scan whitepapers for common red flags, and quickly figure out whether or not the team knows what they are talking about. Reading the whitepaper of a project helps you create a better understanding of the problem a project tries to address, and how it aims to do so.
The whitepaper shows the original vision of the project and helps you check whether or not the team is still sailing that course. Moreover, the crypto whitepaper also provides insights into the technical architecture of a project.
Essentially, reading a crypto whitepaper helps you separate the wheat from the chaff. It helps to sniff out the cash-grab projects and pure scams (there are many!) and narrow down the list of projects to those with potential.
Things to look for when reading a Crypto Whitepaper
As discussed earlier, most whitepapers address three primary questions.
- What is the problem the project is looking to solve? (Why?)
- How does the project solve the problem? (How?)
- What value is created by solving the problem? (What is the use case?)
In addition to these questions, you want to learn more about the team, the tokenomics, and the roadmap of the project.
How to analyze a crypto whitepaper?
Alright, let's get into the interesting stuff. How do we properly analyze a crypto whitepaper? First things first, you want to discard any assumptions you have before reading the whitepaper. Get into this with an open mind, and let go of your biases as much as possible.
Grab yourself a notebook or Excel sheet, and write down your thoughts on each of the following items:
- Read the whitepaper to discover why the project is being launched. What is the "problem" the project is looking to solve, and is this really a problem? Give this a good thought, because many projects address a need that does not really exist. If the project fails this test, you do not need to complete the other questions.
Note that in some cases, the project does not address a literal problem, but rather optimizes an existing process or product.
- Study the suggested solution to the problem. Does the project outline clear solutions to the problem, and does it make sense? This part of the whitepaper usually shows a comparison of the proposed solution to existing technology, and how it is used, and should give you a clear understanding of the project's utility.
- Study the benefit of the solution. If the solution only marginally improves the current processes, is it really worth it to invest the time and resources in developing this solution?
- Study the technical architecture. If the project proposes a new blockchain, study how it works, how it differs from the existing solutions, and how transactions are validated (Proof of Work or Proof of Stake?)
If the project is a blockchain game, or a blockchain application, study the chain it will be built on, and why, and study why it is built on a blockchain in the first place.
- Study the project tokenomics. Study how the tokens are allocated and will be used, the new issuance of tokens (if any), and as the vesting schedules for the different private sale rounds. Be careful when the team owns a large portion of the token supply.
Another great question to ask yourself is: does this project really need a token in the first place?
- Study the project roadmap. Look into the upcoming milestones of the project, and if the team has been able to deliver on the previous milestones (on time). Also take time to consider if the roadmap is realistic.
After these stages, you should have a better understanding of what the project is about, and if you want to invest in it. From there, you can decide to perform further (technical) analysis to determine at which prices you would be interested in buying.
Common crypto whitepaper red flags
Even if the project passes the above test, it is useful to be aware of common red flags in crypto whitepapers. Pay attention if the whitepaper checks one (or more) of these boxes:
- Poor Language: Even if the team is Russian, Chinese, or Portuguese (to name a few examples), they should be able to hire a good editor or translator to publish a high-quality English whitepaper. If the whitepaper is filled with typos or poor grammar, proceed cautiously.
- Too much promise: If a project promises to change the world, or to become "The Next Ethereum", be alert. Overpromising is a classic marketers' move. The best projects are very specific in what they promise, and what they don't.
- Leaves questions unanswered: Generally speaking, if a whitepaper does not address one of the main components of a whitepaper, they have a reason not to. The idiom where there's smoke, there is usually fire, applies here. Be careful.
- Vague whitepaper: Similar to empty promises, if a crypto whitepaper makes vague promises, without a clear explanation of a problem and solution, it is likely a cash-grab project without any utility.
All in all, understanding whitepapers and knowing how to read them is a useful addition to your trading and investing knowledge. This article is a great starting point for beginners trying to read a whitepaper.
Nevertheless, this is only one source, and readers are wise to dig deeper into the concept of whitepapers, and how to analyze them.
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for Alpha Circle as well.
Check out his twitter: twitter.com/cryptojellenl
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