How to Analyze a Crypto White Paper for Investment

With the explosive popularity of ICOs (Initial Coin Offerings) in the cryptocurrency world to raise funds over traditional Venture Capital (VC) funding, there are more and more ICOs being launched each day. Just in the first three months of 2018, ICOs raised more money than in the whole of 2017, according to CoinDesk tracked data. It can be difficult to figure out which projects are worth investing in and which ones may flounder. The first step to evaluating a project lies in the white paper. Although a well written white paper does not necessarily mean that a token will be successful, a poorly written white paper should raise red flags. So what things should you be looking for?

Components of a White Paper
All cryptocurrency white papers will be slightly different depending on the company as well as the business model. However, all white papers should include these topics:

• The problem/context
• The proposed solution
• Competitors/current solution
• Blockchain Technology Advantage
• Token Issuance
• Team

The Problem/Context
This is not something unique to cryptocurrency projects but to all businesses - what is the problem that it’s trying to solve? Is it actually a problem that exists and why is a solution needed now? Are there any trends or changes in economy, culture etc that indicates this is the right time for a solution to this issue? Often startups will fall in love with an idea and create a problem that doesn’t really exist and isn’t solving a real pain point. The problem should be clear, concise and should resonate with the people whose pain points are being solved.

The Proposed Solution
A startup’s solution should clearly articulate how their product or service solves the problems they’ve stated. It sounds simple but many white papers do not clearly position the problem and how their company solves this. Many white papers will include so many buzzwords or technical jargon that it’s hard to determine what they are actually doing or what their value proposition is. If it’s not clear what the project is actually doing, it’s likely not something you should invest in because if you can’t understand the business value, how can a consumer?

Competitors/Current Solution
Are there companies already in the space solving this problem? Are there other solutions that consumers are using but which aren’t effective or adequate? The project should have a clear idea of who they are competing against and why those companies and solutions are lacking. Projects should know who they are competing against on blockchain and off. For the keeners out there who want to go a step further, check Telegram crypto groups to see if there are already projects out there that may be doing the same thing.

Blockchain Technology Advantage
Because of the hype of crypto and blockchain, everybody and their cat want to build something on the blockchain. However, there are clear areas where blockchain technology is actually an advantage and improvement over traditional database management and many projects are not able to present a true advantage for using blockchain for their project. Why is this project on the blockchain and what are clear examples of the advantage? For example, reviews/credentials where reviews on the blockchain can be automatically certified. Another example could be a logistics supplier that automatically fulfills a contract because of a smart contract.

Token Issuance
It should be clear what the token economics are (value, amount of tokens that will exist, when the tokens will be sold/released, how the tokens will be partitioned for sale, community, rewards etc), the mechanics of how the token will actually be used and managed on the platform and any technical considerations of how the token is issued. How are they allocating to founders and advisors. Are they allocating too much to these two groups? Do they set aside tokens for the community and how are those tokens being used? How the company plans to use the funds raised should also be included as the omission of this could indicate a variety of reasons, none of them good, such as a lack of company direction/experience or that this is a scam coin.

Team
Although this point is last, it is often considered one of the most important factors to consider when investing into any company. Does the team uniquely have the skills and/or experience to execute on this solution? Does the team have the right synergies with the right mix of skills? Is there technical talent on the team? If there is, are they being outsourced? Just check LinkedIn to see the team and if the engineers work for a consulting company, it’s likely the ICO has just hired consultants rather than having internal tech talent, which could indicate a lack of vision or commitment to the project. While not strictly required to be successful, there are two issues with not having technical talent from the beginning - (1) does the team actually understand the technical feasibility of the project, and (2) will they be able to hire the technical talent when they need it? Projects overestimate ability to find a blockchain engineer but this type of talent is highly sought after, hard to find and also extremely expensive to hire for.

In Conclusion
While these topics are not exhaustive of what you should look for in a white paper, it’s a good start. If a project doesn’t have these basic things, you should proceed with caution. It may be indicative of a project that you might just need to do more research on or it could mean scam ICO and you should run as fast as you can the other way.