One of the golden rules of investing is to understand the company, industry, and reason that you are investing. Educated investments are the ones where the investor thoroughly understands how they will make money from the investment.
However, that can be difficult when you’re dealing with new technologies like blockchain and cryptocurrency. Many people see the significant potential gains and want to invest their money before understanding what they’re getting into. But it’s important to understand the company you’re buying coins and tokens from instead of blindly investing because someone on Twitter is pushing a particular cryptocurrency in the market.
The good news is there are resources available to help you understand the blockchain technology companies you’re investing with and perform the critical due diligence necessary before buying into a cryptocurrency. There is usually chatter about particular cryptos in forums and on social media platforms, but often the best place to start is simply the company’s website.
That’s where you’ll typically find the company’s white paper, which should be one of the primary factors behind your decision to invest in a cryptocurrency. white papers are a key resource to learn about a blockchain company, and we’re going to give you some critical points to look for when you’re reading a company’s white paper.
What is a crypto white paper?
Let’s take a quick moment to define a white paper. Traditional companies that trade publicly want to attract investors, so they have business plans and resources to explain their business model, growth strategies, and future milestones.
The same is true for blockchain companies. The new crowdfund investing style has changed the landscape slightly, but cryptocurrencies usually provide all of their business-related information in a white paper.
Strong white papers primarily act as business plans that outline the blockchain company’s business model, the problem they’re solving, how they’re addressing it, the team behind the project, and any other information to build credibility behind their project.
What to look for in a white paper before investing?
White papers can make or break it when it comes to a cryptocurrency investment. A blockchain company that has a professionally developed website and an easily understandable white paper has a great chance to attract more investors than a company that looks like it quickly threw together a few presentation slides.
With over 1,500 different cryptocurrencies in the markets now, it’s essential to become familiar with white papers and the process of using them as a resource for your investing decisions. It's especially true when it comes to ICOs and new blockchain companies that haven’t been trading on the public crypto exchanges.
However, we know that some white papers can be long, complex and daunting. To keep you from getting overwhelmed, here are a few key things to watch for when you’re looking through a cryptocurrency white paper:
Take note of the legal structure of the project. Have they formed a company yet? Which country is it registered in? As a U.S. citizen, you might not be able to invest in offshore ICOs. Check to see if they share their address and if they’re operating from an office or other space. Having a defined legal structure helps add credibility to the company, rather than investing in an unknown entity and group.
You want to have information about the development team available, so you know what skills and experience are backing the company. Some blockchain companies stay anonymous or hide their team; you want to keep your distance from those companies. That’s a perfect recipe for a scam cryptocurrency.
Other times the company will try to inflate their team members. You want to check on the experience of the key members of the team and evaluate if they are capable of achieving the company’s goals.
Good blockchain companies will have strong development teams listed in their white paper and displayed on their website.
Blockchain technology has the potential to solve a multitude of problems and inefficiencies in business and the world. white papers are the perfect place for blockchain companies to explain how their business and product address specific issues.
When reading a white paper, you want to be on the lookout for the key problems identified, and understand how this company is using blockchain to solve it. If you can’t get your mind around the use case and it seems impractical, then the company is probably not the right investment.
Product: white papers will often share details about the product or prototype. Depending on the company’s stage in the process, they might be actively building the prototype, or they might have a functioning product with live users.
It's an important part of the white paper for potential investors to understand. Blockchain companies that don’t have a working product are a much riskier bet than companies with an active blockchain and user base.
Good white papers also frequently share technical details behind the product and blockchain. Often they will publicly share their code on a platform called GitHub. While it may not be in your skill set to read through and understand the technical language, that’s where ancillary resources are incredibly helpful.
There are forums like Reddit and BitcoinTalk where the cryptocurrency communities are more than willing to share their thoughts and opinions on different cryptos. A lot of crypto enthusiasts are tech-savvy, and share their thoughts on the technical details of a blockchain company’s white paper. So if you don’t quite understand the technical sections of the white paper, read through some threads on the company and see if anyone else breaks down the information in plain English.
The other thing you want to look for in cryptocurrency white papers is a clear roadmap for the company. It should probably include a history to date of the company’s progress and key milestones. Again, keep your distance from cryptocurrencies that have short histories that only include ICO preparation.
Then there should also be key benchmarks and milestones for the future. It's where you want to evaluate and determine if the roadmap dates are practical, and if the development team is capable of delivering on the proposed time frame. Many blockchain companies map out optimistic roadmaps, so it’s important to temper expectations and stay updated on companies you’re considering through social media channels like Telegram.
Cryptocurrency investments are just like any other investment you make. The key is understanding how the investment vehicle (company, stock, bond, real estate, crypto) is going to deliver returns on your money.
When it comes to cryptocurrencies, this can be a new feat for many people just entering the crypto markets. Many of those people are eager to get their money in and start investing in cryptocurrency. We’ve noted before that patience is important, and there are some fundamentals to get under your belt before diving into the deep end, like understanding crypto wallets and exchanges.
Now we can add understanding white papers to the list. Just as you would want to read, understand, and believe in a company’s business plan before investing in shares, you want to have a firm grasp on the blockchain company before investing in its cryptocurrency. In a marketplace where there’s a new scam popping up right and left, it’s a buyer beware market. white papers are a good compass for investors to navigate the murky waters and make smart investments in cryptocurrency.