A decade ago, those who tried to sell the idea of cryptocurrencies were largely frowned upon or outright dismissed. Nowadays, it seems like everyone and their mother is rushing to get a piece of these digital assets. But how exactly did we get here? We shall explore how to spot a valid cryptocurrency from its whitepaper and break down how such a coin can gain value over its lifetime.
Defining the whitepaper
A whitepaper is a document that is published by the developers of a cryptocurrency to explain the purpose of their project, as well as the technology it utilizes. It lets potential investors know how the idea behind their project came about, how it was achieved, as well as the utility of the project. It contains data of various forms, which is aimed at convincing investors that the project is worth throwing their financial support behind. It also highlights the project’s distinction from other competing products in the market.
A good whitepaper should invoke a sense of legitimacy and professionalism in the project. So, what should it contain?
Contents of a crypto whitepaper
- A problem statement and solution – The project must have a problem it intends to solve, and the whitepaper should highlight how the team intends to tackle it. This solution should have a detailed product description and market analysis, which shows how the project aligns with the existing market.
- Token information – This includes details such as the total number of coins in circulation, the platform they’ll be hosted on, their consensus mechanism, the distribution of the initial tokens, and what happens if the ICO doesn’t obtain adequate funding.
- Technical description – This details the technology the project is built on.
- Project roadmap – This provides a schedule of how the team intends to achieve their project objectives.
- The project team – This part introduces the team behind the project, the developers, founders, and advisors.
How a cryptocurrency gains value
Before we even talk about digital currency, why does fiat currency, or any other medium of exchange for that matter, have value? It is simply because enough people agree that it does. Because when you think about it really, fiat currency is just worthless paper with the faces of dead presidents printed on it. What’s more, it can be printed as often as the central bank desires, which could result in widespread inflation. Fiat money can also lose value if the government or central bank behind it is unable to back it.
Therefore, its value can be attributed largely to its supply and demand. For instance, if foreign governments hold more USD reserves, it reduces the greenback’s supply and thus increases its value. If they get rid of their dollar reserves, the dollar’s value plummets, crashing the American economy. In light of this, let’s look at some of the factors that can affect a cryptocurrency’s value.
Supply and demand
Bitcoin, the oldest cryptocurrency in existence, has its total supply capped at 21 billion. The more people adopt BTC, the higher its demand, which leads to a corresponding increase in value. This demand could be driven by several factors. For instance, when Venezuela was plagued by soaring inflation, most of the populace turned to Bitcoin, which increased its demand and raised its value. Bitcoin halving events, which happen every four years, have been associated with a sense of reduction in cryptocurrency supply, which is why they tend to be followed by a bull run.
Usually, major upgrades and forks to the technological infrastructure of a digital asset tend to result in volatility. For instance, the Bitcoin blockchain forked into Bitcoin Cash in 2017, which culminated in new ATHs for both coins. More recently, in 2021, Ethereum’s London fork resulted in an 8% rally in ETH’s price.
However, these upgrades don’t always result in a positive price movement. For instance, the upgrade of Cardano to Plutus-powered smart contracts caused a 22% rise in the price of ADA, but its subsequent Alonzo hard fork resulted in a 10% drop in price.
The influence of celebrities on crypto prices has especially been evident with meme coins, which tend to have little to no utility. In 2020, Tesla and SpaceX CEO, Elon Musk, took to Twitter in December and made a complimentary remark to Dogecoin. As a result, the coin spiked 20%. Two months later, he was back at it again, and this time the coin rallied by 40%.
Again, two months later, he tweeted the famous painting by Joan Miro, Dog Barking at the Moon, with the caption “Doge Barking at the Moon.” This time, the coin doubled in price. Other coins that have benefited from the billionaire’s influence include Floki Inu, Shiba Inu, and Santa Floki.
Crypto whales are addresses that hold more than 1% of a cryptocurrency’s total supply in circulation. Due to differences in market capitalization, this may mean holding different dollar amounts with different cryptocurrencies. Be that as it may, crypto whales are known for their uncanny ability to move the markets with large trades. Typically, they place huge buy orders, which raises the coin’s price. On seeing this, other investors rush to buy the coin out of fear of missing out on the incoming rally, causing the coin’s value to surge further.
A cryptocurrency’s legitimacy and potential can be determined by its whitepaper. This is because this document highlights the problem the project is trying to solve, and how the team behind it is solving that problem. This can entice investors to buy into the coin, creating a demand that increases its value. Other factors that could cause its price to spike include celebrity endorsements, technological upgrades and he actions of whales.