Having gone through more than my fair share of white papers and reading about more ICOs than I would care to admit, certain patterns begin to pop up in the language. And these patterns are usually truthful, but deceiving on a higher level.
Some of it is the sort of pitch language where the writer has clearly gotten away with themselves using unsupported claims, but sometimes the wording is just put in a deceiving way that not all investors know how to see through.
Making Broad Claims
The number of times I have competing white papers where both companies claim to be bringing blockchain to a space where it has never been used before (when both of these companies are clearly operating in the same space) is a little astounding. Yes, it is possible (and even likely) that both companies were conceived of without knowing about the other, but adding a little competitive analysis into the paper wouldn’t hurt.
And this is ignoring all the white papers which basically re-explain Bitcoin, put a small twist on it, and then call themselves revolutionary. If I’d never heard of blockchain technology or Bitcoin, I would probably fall for this myself. I know it is very unlikely someone would read a white paper without knowing about Bitcoin, but there is something to be said about companies that are willing to make unclear claims once… they’ll probably do it again.
Where Things Get Really Confusing
Some metrics are used time and time again to help technologists claim some sort of supremacy for their protocol. There are two that stand out: transactions per second and market capitalization.
Transactions per second is a simple idea that plays to the worries many blockchain naysayers have. The ability of cryptocurrencies to scale is constantly in question, and the best way to measure their ability to handle a higher capacity is by looking at how many transactions can be processed by particular cryptocurrency. The problem arises when it becomes clear this is a marketing gimmick more than an effective tool for evaluating the long-term potential of a coin.
When Bitcoin implemented SegWit, all the current problems with unconfirmed transactions disappeared and for the time being, there are no more issues with it. Some better questions for investors to ask is, what is the current demand on the system, is the protocol meeting those demands, and what are the plans to increase the capacity in the future?
The other deceiving metric is market capitalization, as it often uses the total number of coins in existence rather than the total amount in circulation. This difference is key, as otherwise, a massive inflation of market capitalization can occur.
For example, this inflation may occur if only half of the coins are in circulation. The company would hold the other half of the coins, and the current trading price is applied to those uncirculated coins regardless of the fact they have never been bought or sold.
A better way to evaluate the market capitalization of companies is by assessing the amount of real capital that has been invested into it. This would give an accurate picture of the aggregate and bankable interest the world has in that protocol, and takes away the loopy financial valuations that can occur when companies count undistributed coins in their market cap.
These are very simple tips and ideas about seeing through unbacked claims and looking for the right metrics to value cryptocurrencies, but they are extremely important to help prevent overvaluing coins and the massive losses that can come in a market correction.
However, this advice only applies if you are investing for the long-term and not just performing a quick profit-seeking trade. Over the short-term this sort of fundamental information is unlikely to affect your profits.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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