How to make investment decisions in Web3 by reading the whitepaper?

Introduction

Are you looking to invest in a crypto project by reading the whitepaper?

Cryptocurrency is a hot topic these days, and many investors are looking to grab the opportunity that the crypto market presents. Given the lot of crypto projects in the market, it would be equally challenging to decide which ones are worth investing in. Crypto market investments are inherently risky, so you should only invest what you can afford to lose.

Most of you buy tokens assuming there will be an increase in value. But have you ever researched a project before investing in it?

This is going to sound crazy. I will discuss one of the most important sources to research your crypto project, i.e., the whitepaper. In this article, I will explain what you should look for in the whitepaper and what are the red areas to be considered as showstoppers.

So first, let's understand what is a whitepaper?

Whitepaper is a document released by developers that explain the technology and purpose of the project they are working on. It tells a prospective investor how the crypto was conceived and highlights its purpose. It also gives the potential investor the breakdown of a cryptocurrency. It is generally available on the project's website. In short, a white paper is a summary of a crypto project.

How would you differentiate between a good and bad whitepaper?

A good whitepaper will include real-world examples that help explain a project's features and uses more clearly. It should also be well-researched and presented clearly and concisely. On the other hand, a bad white paper will look like a PowerPoint and sounds like an advertisement with no detailed or in-depth information. Therefore, it is important to separate.

As an investor, let's dive in and understand what you should look for in the whitepaper.

Top 10 things you should look for in the whitepaper

It is essential to do your due diligence thoroughly before making any decision. In this context, I have compiled a checklist of the top 10 things you should look for in the whitepaper to help you make informed decisions. Here they are.

☑ Problem Statement and Solution

☑ Opportunity

☑ Utility and Use case

☑ Architecture

☑ Tokenomics

☑ Roadmap

☑ Partners

☑ Investors

☑ Track record of founder and his team

☑ References

We shall now discuss each of them briefly as below.

1. Problem Statement and Solution

A problem statement is an essential component of a whitepaper. This will be the underlying reason for the project. It discusses the issue or challenges that the whitepaper is addressing. It should be supported by data and evidence and must be clear and concise.

Whereas a solution explains the strategy to address the problem statement. For instance, in the case of Bitcoin, it solves the problem of centralization; payments can be made without going to a middleman.

2. Opportunity

This outlines the potential benefits and returns the project or investment can generate. It discusses the market opportunity, competitive landscape, growth, and project potential. It also gives an overview of the revenue generation aspect, target market, and customer base. This helps the investors to make informed decisions about the viability and potential returns of the investment. Finally, it provides an overview of unique selling points, features, and benefits of the project or asset that differentiate it from the competitors.

3. Utility and Use case

This helps the investor to evaluate the project's potential for market penetration and identify potential risks and challenges. It provides insight into the broader market landscape and competition and assesses whether the project has the potential for widespread adoption and long-term success. It will also help to identify potential regulatory challenges and compliance requirements.

4. Architecture

When analyzing a project, it is very important to read the consensus mechanism or algorithm of the project. This explains the blockchain technology underlying the project and why the project has chosen a particular blockchain. This provides insight into the project's level of innovation and differentiation from existing blockchain solutions. It helps an investor to evaluate its technical capabilities and limitations. It could have the potential to deliver its promises or ability to handle higher transaction volumes or provide adequate security.

5. Tokenomics

Token distribution is key to any integral part of tokenomics, and every project has initial token distributions. If a small group of people controls the whole project, then it is against the key principles of blockchain. Also, check if there are mechanics for a cap or if there is a strategy for the burn to control the circulation of tokens. Sources of supply and demand drivers are essential components in tokenomics. Supply sources include the annual inflation of a token, its initial allocation, and its vesting schedule. If the cryptocurrency vesting schedule is lengthy and smooth, then selling pressure shouldn't affect the price at all. On the contrary, if the vesting schedule is short and staggered, then it will affect a lot of price panic.

6. Roadmap

The project should have a well-defined and achievable roadmap for development and implementation. This ensures that the project stays on track and reaches its goals. It should include key dates for development, launch, and expansion.

7. Partners

Partnerships are important, as a few are highlighted in a whitepaper. The benefit of the partnerships can be assessed by the quality of other projects associated with the whitepaper. Check if those projects' coins and tokens are still actively traded and listed in reputable cryptocurrency exchanges. Also, forecasting future partnerships is possible by looking at the background of team members and their affiliates.

8. Investors

A Venture Capital (VC) investment in the project indicates that it has received funding from a reputable and experienced investor. It is a positive signal for potential investors that the project must have been vetted by knowledgeable professionals and is likely to have a strong long-term outlook. In addition, if the VC is affiliated with a major cryptocurrency exchange, it suggests that the project's token will be listed soon.

9. Track record of the founder and his team

Get to know about the founders through the white paper, their background, and earlier project, if any, done by them. Check their LinkedIn, GitHub, and Twitter profile. Research about the team is very important when you want to avoid investing in a project with an unsuccessful track record. Look for consistent performers.

10. References

This is the last thing to look for in the paper. The references section often reveals that the reference papers and authors are real, as mentioned in the source. This indicates that the team has done the research and due diligence while preparing the paper. It also indicates that the project team respects intellectual property rights by giving credit to the original creators of the information used. Quality sources include scientific research papers that are publicly accessible or other crypto projects. The same applies to footnotes that may sometimes contain critical information.

What are the red areas that you should consider as showstoppers?

Having discussed the important contents to be looked at in the whitepaper before investing in a project, it is equally important to be aware of any red flags or "showstoppers." These showstoppers may indicate significant issues with the project and may need to be more viable to deliver its promises. So, let's now discuss some of the most critical red areas to watch out for while reviewing the whitepaper to identify any potential investment pitfalls.

1. Access to whitepaper

When the team has not linked any whitepaper to its website or has no documentation of the project, it is a sign that they need to be more transparent about its intentions, which is concerning for the investors. Projects may withhold the whitepaper to hide fraudulent activities or lack of substance. This can be a major red flag for investors, who exercise caution before investing in such projects.

2. Lack of professionalism

Several typographical errors and spelling mistakes can make the project team appear unprofessional and unprepared and act as a red flag for the investor. This shows that the team needs to take more interest in proofreading and correcting errors in the whitepaper.

3. Vague statement

If the whitepaper is too complex, it is a sign that the team really can't explain what they are doing and is considered a red flag. The tone of the whitepaper must be formal and professional. If a whitepaper begins only with a brief background and defines the purpose of the project without even bringing up their competitors but talking to others about crypto projects is a bad sign. Also, if it describes only the problem without a solution, then it is a real problem.

4. Overpromising

It may be an intentional attempt to deceive investors. They set unrealistic expectations for the project, making it more likely to fail to deliver its promise. This is a red flag for the investor, considering the project lacks credibility.

5. Centralization

Poor governance can lead to the centralization of power in the hands of few individuals or entities, creating the risk of corruption and abuse and being considered to be a red flag. As a result, it would be difficult to make necessary updates and improvements to the project that negatively impacts its value and competitiveness.

6. Regulatory issues

It refers to the possibility that laws, regulations, or government policy changes could negatively impact the token's operation, adoption, or value. It has a major impact on the success of the proposed token or cryptocurrency, resulting in limits on the token's utility and adoption or an increase in compliance costs and legal risks for those involved with the token. It may also impact the token's market value as changes in the regulatory environment may trigger market volatility and uncertainty among investors and users.

7. Project without roadmap

When a project does not disclose its road map or progress to date, or if the milestones are not logical or unrealistic, it is a red flag. If the timeline quoted in the project does not work for you as a potential investor to reap the profits, then it is not an ideal investment.

8. Unrealistic token metrics

If the token supply is insufficient to meet the project goals, this may lead to a decrease in token value that acts as a showstopper. If the project fails to deliver its promises, it may result in legal action against the project.

9. Lack of utility for the token

Tokens without clear utility or purpose will not have any value in the market and are a red flag for investors. This type of token will have little demand in the market and lead to a situation where the token has little trading volume and low liquidity that can impact the token's value.

10. Changes in the core team

If there are multiple versions of the white paper, this implies that the team is not constant with the initial idea. Also, if there is a history of change in the core members, then it is a red flag that there is no cooperation and arguably more important than any degree or employment history.

11. Lack of references

Whitepaper without reference is more like a sales manual instead of an academic paper. As a result, investors cannot verify the claims made in the whitepaper, which is considered a red flag. This may lead to decreased investor interest impacting the credibility of the project.

Conclusion

Researching the whitepaper of the project is the critical step. Look into the team and assess if they have received feedback from the community on the whitepaper. This would help you know how serious the team is about the project. You can also get into a call or connect with the project owners in the email and seek additional clarity. Additionally, you can compare it with other established cryptocurrencies to assess whether it is worth buying. Aware of what you are buying, research on the internet, and do not buy something in a pump and dump scheme. Understand the artificialness in the project and always make informed decisions.