Name one thing you have ever purchased in your life without doing proper research beforehand, understanding the value said purchase has, its technical specs, and weighing advantages versus disadvantages. A house? No way! A car? Not without thorough testing! An ice-cream? Hmm, maybe, but even in this case, people research a bit about the flavor, the ingredients, the allergens, etc.
It only stands to reason that before putting money into a crypto project, future investors expect to see a document that explains what the project solves and how it will do it. That’s where the cryptocurrency white paper comes in.
Suppose you’re new to the crypto space, and it’s your first time taking an interest in a blockchain project. In that case, we will guide you through understanding white papers and how you can identify a good cryptocurrency white paper from a poorly written one.
White paper definition
A crypto whitepaper or white paper (both styles are accepted) is an official document that explains the purpose and technology behind a particular project. Any new blockchain project worth your time and potentially money will have a well-articulated white paper that presents the value of the project, all the technical applications, specifications, market research, etc.
White papers existed long before the blockchain space. The first one is actually political, the Churchill White Paper from 1922. They have been used as marketing and sales tools to promote products and services through the decades. Of course, the first crypto-related white paper was the Bitcoin white paper that explained the original vision for the Bitcoin protocol and blockchain technology.
Typical cryptocurrency white paper structure
Many projects use a pretty standard and straightforward structure for their cryptocurrency white papers. When reading such a document, you should always pay attention to the following sections:
- Reasons why the project exists
- Project’s utility and use case
- Blockchain architecture and other tech specs
- Token allocation, distribution, and utility
- The team behind the project
These are the most important talking points that blockchain investors should read and understand. White papers could have more sections, but be careful if they have fewer. If you feel that the structure is unclear, if the writers have done a poor job presenting the correct information, or necessary data is missing, then it’s probably best to step back. There have been quite a few scams related to new projects that even had white papers. Let’s dig further and see how to spot red flags in white papers.
Crypto project red flags - poorly written white papers
When considering a new crypto business, you have to make sure that it’s a well-thought-out project. Most blockchain investors look for the following red flags in a white paper:
Typos and grammar mistakes: Not all white papers are written by English native speakers, and sometimes they are not primarily intended for English native investors either. However, English is a universal language, and digital currency or blockchain projects also have a universal nature, so the official documents should be adequately written or translated into a world language.
Vague claims: It’s critical to understand what a project aims to achieve and how exactly. If the white paper is full of vague claims without proper explanations on what problem they have identified in the market and what solution they bring to the table, maybe it’s time to reconsider your investment. After all, you wouldn’t buy a car without a solid answer on what type of engine it has, how much it consumes, or other technical aspects.
Unrealistic promises: Look out for overpromising and too much technical jargon. A white paper should be clearly written and provide fairly straightforward explanations for any claim they make. When discussing a novel idea or new technologies, if you feel that there’s too much speculation and not enough substance, that should make you think twice before investing.
Non-existent or hard-to-find white papers: If you have to put your Inspector Gadget hat on and do detective work to find white papers, that’s a big no-no. Serious projects offer the proper documentation directly on their website so that anyone interested in reading it can find it easily.
Now you know what information to look for in a crypto white paper and what are some of the most common warning signs that a project might not be worth your time. Do your due diligence, trust your gut and follow sound investment philosophy, meaning you should never invest more than what you afford.
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