It's fair to say that cryptocurrencies aren't always easy to understand. Cryptocurrency has only been around since 2008, so it's still a new concept for many people. There's also a constant influx of crypto projects that have their own unique features and technologies. Fortunately, a whitepaper gives potential investors a detailed breakdown of a cryptocurrency.
What is a whitepaper?
A whitepaper is a document that explains the purpose of a project and how it works. For a cryptocurrency, the whitepaper is a guide to its technology, features, and goals. It's designed to introduce the project to a new audience of prospective users and investors.
Cryptocurrency whitepapers are normally written in an academic format with technical information, statistics, and diagrams. Founders of a new cryptocurrency publish the whitepaper before launch to generate interest, especially if they plan on holding an initial coin offering (ICO) for fundraising purposes.
It's important to clarify that there are no rules about what constitutes a whitepaper. Having a whitepaper doesn't mean a cryptocurrency is a quality project. The team behind a project can write the whitepaper in any style they want. They’re not always detailed -- or even useful, as anyone who has read the whitepaper for a meme coin can tell you.
Understanding a whitepaper
The key to understanding a whitepaper is taking your time on it. Most whitepapers aren't light reading.
It helps to look at a cryptocurrency whitepaper as a way to answer the most important questions about that cryptocurrency, starting with its purpose. A whitepaper should cover the real-world problems its cryptocurrency is attempting to solve, and this information should be presented quickly. Be wary of cryptocurrencies with lackluster goals, such as "building a strong community," or, worse yet, "putting memes in space" (that's an actual goal from a crypto project).
The whitepaper should also explain how the cryptocurrency's technology works. Look for how it validates transactions and adds new tokens to the circulating supply. For example, Bitcoin (BTC +2.38%) does this through a system called proof of work, which relies on miners who expend computing power. Other cryptocurrencies have their own methods, with proof of stake being another popular system.
One more important item to look for in a whitepaper is a roadmap. This lays out a project's goals, such as launching its mainnet or getting listed on major crypto exchanges, and when it plans to accomplish them. For projects that have already launched, reviewing the roadmap is a good way to see if they've stayed on track.
Importance of whitepapers
Whitepapers are the introduction to new cryptocurrencies. They're also typically the most thorough description of cryptocurrency projects. Although a cryptocurrency's website should also have plenty of information, a whitepaper is more in-depth and will likely cover technical details that a website might not.
A whitepaper is the best way to educate people about a cryptocurrency and to attract investors. If you're investing in cryptocurrency, whitepapers are one of the most detailed resources for learning about them. It can take some time and patience to get through a whitepaper, but it's well worth it to fully understand a cryptocurrency before you invest.
About the Author
