The Ultimate Guide on How to Understand a Cryptocurrency White Paper

Today, cryptocurrency is a popular buzzword. We hear about it on the news, we read about it on the Internet. 

Yet, people are reluctant to invest in cryptocurrency. 

Why?

A survey, which united hundreds from respondents in Great Britain, has shown interesting results:

  • 97% of respondents haven’t bought cryptocurrency
  • Out of 3% of respondents, who bought cryptocurrency, 97% invested in Bitcoin
  • Only 5% of millennials, 3% of Gen X, and 2% of baby boomers would consider investing in cryptocurrency. 

Interestingly enough, 31% of respondents aren’t buying cryptocurrency because it’s ‘too high of a risk’ or they don’t fully understand, what purchasing a cryptocurrency involves and how it works. 

Such a reaction at cryptocurrency is universal. Because investing in cryptocurrencies involves high risk, you can understand why people are so hesitant to invest in it. 

This is why cryptocurrency white papers exist. 

What is a Cryptocurrency White Paper?

Cryptocurrency white paper is a document, presented by a startup, which is aimed at informing and encouraging investors to participate in the ICO, initiated by this startup. 

Cryptocurrency white paper has as its aim:

  • informing the investors of a project involving cryptocurrency
  • explicitly explaining what this project is set to accomplish
  • giving reasons why this project is needed
  • describing the roadmap to how this project will be implemented and what methods will be used to reach the goals of this project

Ultimately, cryptocurrency white papers exist to help investors make an informed decision. 

How to Understand a Cryptocurrency White Paper?

Cryptocurrency white papers can be hard to read for those, who know little about cryptocurrency and ICO. They are full of tech lingo and are written in a formal style which can be hard to comprehend. 

To help you, as a potential cryptocurrency investor, understand white papers better, let’s take a look at a guide on how to read them properly. 

Step #1: Scan the Structure

To understand a cryptocurrency white paper, it is essential to know what constitutes it. 

The structure of a cryptocurrency (ICO) white paper consists of the following sections:

  • An introduction, which consists of a statement of the problem, a brief description of the problem as well as of the current situation on the market.

Introductions to the ICO white papers can contain additional information, necessary for the investors to understand the problem in its full scope. For instance, the introduction to Ethereum’s ICO white paper contains information on the history of cryptocurrency, the description of bitcoin, information on mining, alternative blockchain applications, etc. 

Introduction also must include the description of basic concepts, definitions, and the algorithm of application. 

  • Presentation of the project with a detailed description of implementation strategies. This is one of the most informative parts of a cryptocurrency white paper, containing information on token commercialization, product placement and its interaction with the economy. 
  • Risk factors describe the issues that may occur during the implementation of the project described in the cryptocurrency white paper, and how these issues will be tackled. This is the most interesting section for first-time investors, who are reluctant to invest in cryptocurrency, as it gives all the answers to the questions regarding risk factors. 

This part also describes budget breakdown to assure future investors that the described project is not a scam. 

  • The application section contains the implementation strategy and the description of how the project will be applied. Here, provide the investors with details on how your idea will be implemented, and its potential application in different areas. This part is necessary to help understand the practical application of the product and its competitiveness. 
  • To support your claims, add a section on market analysis, a description of other similar projects,
  • The conclusion sums up all the key points of the cryptocurrency white paper. 

When reading a cryptocurrency white paper, potential investors should pay attention to disclaimers, which are usually placed in the introduction part of the white paper. Disclaimers provide legal information for the investors and cover the following points:

  • limitations placed on the purchases 
  • purchase-associated risks
  • legal issues that impact the purchases

Although a cryptocurrency white paper is not a legal document per se, it still deals with investment in cryptocurrency, which, in turn, may bring forth some legal issues. So, to understand a cryptocurrency white paper in its full scope, it is important to study the disclaimers in detail. 

Step #2: Look Up Unknown Terms

First-time cryptocurrency investors may be overwhelmed by the abundance of technical terms in a white paper. 

A cryptocurrency white paper is essentially a technical guide, so to understand it, you need to grasp the essential terms, which a cryptocurrency white paper contains. 

Some white papers include a glossary in the beginning right after the introduction. For instance, Credits, an open infrastructure blockchain protocol, included a list of essential definitions to help investors understand the project that they invest in. 

However, the number of terms, unknown to an investor, can be bigger than the one covered by the glossary in the introductory part of a cryptocurrency white paper. To cover all the terms, it is recommended to do a preliminary reading of the whole white paper to fish out all the unknown terms and study them. 

It is also possible to have the terminology analysis done for you. Services, like Cryptominded (a glossary of cryptocurrency terms), TrustMyPaper (a hub of professional writers), GrabMyEssay (an online platform specializing, among others, in technical documentation and white papers) or Studicus (a community of writers, who do analytical reading of the white papers with footnotes), can help you grasp and understand essential cryptocurrency terms. 

The knowledge and understanding of the terms in the white paper are especially needed to understand token distribution and commercialization, consensus algorithm, as well as the explanations of the source code. 

Step #3: Understand the Essentials 

After you do a preliminary reading to grasp and analyze the terms, the next step is to make sure that you fully understand what white paper describes. 

The essentials that investors need to understand to make a well-informed decision, include:

  • The validity of the company you invest in. Look for the information that confirms that the company behind ICO is registered. This information is essential because it will help you trace the history of this company.
  • Extensive information on the product/service. The product/service described in a white paper should be feasible, meaning that a white paper should contain enough credible information that explains the practical application of this product/service as well as its competitiveness. This information should be valid and well-researched, with sources for analysis provided in the white paper as well. 
  • Explanation of the problem, potentially solved by the product/service, which should also be well-researched and based on facts and market analysis. 
  • Availability of PEST analysis, which covers political, economic, socio-cultural, technological, and sometimes additionally legal and environmental factors, which influence strategic management and implementation of the project. 
  • Details on the executive team. The success of the project behind the ICO depends on the team that will work on bringing this project to life. Look for the section that provides extensive information on the team’s experience working on and successfully executing the same projects. It is also good if a white paper contains endorsements from popular companies or entrepreneurs that you can trust. 
  • Full description of the blockchain ecosystem, to help you understand whether it’s an existing blockchain, like Ethereum, or an entirely new blockchain ecosystem. 
  • Information about tokens, from the registry of a token symbol to growth prospects, investment yield, crypto exchanges, buying pressure, and token distribution. 

Take a look at the style of a white paper. “A cryptocurrency white paper should also be written in a formal, objective style”, says Neightan White, a cryptocurrency white paper specialist at BestEssay Education. Subjective information may compromise the validity of the white paper and the ICO it describes, and confuse the investors. 

The credibility of a cryptocurrency white paper is determined by the credibility of the information it provides. All claims should be supported by credible resources, which should be listed to help the investors understand a cryptocurrency white paper and do further research. 

In Conclusion

To understand a cryptocurrency white paper, investors should to an analytical reading of this document, to make sure that they understand:

  • the structure of the white paper and its components
  • the legal information that puts limitations on the cryptocurrency purchase, and other issues that investing in cryptocurrency deals with to evaluate risks
  • the terminology 
  • the essentials, which include the details on the product/service, the applications of the product/service supported by PEST and market analysis, as well as the information on the blockchain ecosystem and details about the tokens. 

Cryptocurrency white papers can be hard to grasp since they contain so much technical information. With this guide, you, as a potential investor, will know, what information to look for when reading a cryptocurrency white paper, helping you to fully grasp all the essential information it contains and make a well-informed decision. 

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