“Do your own research” or “DYOR” has become one of the dictates of the crypto space, and with good reason. It’s a sentiment reflected in Discord communities and Telegram groups.
With hundreds of projects – some legitimate, some not so much – trying to grab attention and attract investment, all crypto users have a responsibility to protect their funds and ensure they are well-positioned to make informed decisions.
Easier said than done, especially when you don’t know where to start.
Since 2021, over $575 million worth of cryptocurrencies have been lost to fake investment scams. People are often lured by projects promising high returns and fail to consider the actual value on offer.
While there is risk associated with any crypto investment, it is possible to mitigate it by being aware of the red flags and whether or not to believe what you read.
In addition to knowing the facts, it is also important to diversify investments and build a portfolio that suits your risk profile. From earning interest on stablecoins to speculating on NFTs, there are a number of ways to get exposure to the crypto space. It is important to consider the risks and rewards associated with these different options and to strike the right balance.
In this installment of our crypto beginner’s guide in collaboration with Luno, we’ll delve into the idea of ”DYOR” and what it actually means to properly research a crypto project. After all, it is always beneficial for you to know what you are investing in.
Why does the crypto project exist?
This is the first question you must answer.
Most crypto projects release a white paper outlining their purpose, vision, and roadmap. This document was created specifically for potential investors and can usually be found on a project’s official website.
A white paper should be clear and easy to understand. If you read one and don’t make sense of it, that could be a potential red flag. That being said, it’s important to also expand on your basics to better understand and connect the dots – our six-part crypto beginner’s guide is a great place to start.
Fraudulent projects could put together a whitepaper full of buzzwords — like Web3, Metaverse, and DeFi – without really explaining what the project does. They rely on unsuspecting investors to buy their cryptocurrency without understanding the underlying value.
In addition to the content, it is also important to look at the branding and design of the document. If the white paper is very similar to a middle school student’s PowerPoint presentation, it’s probably best to be extra cautious.
This also applies to the project’s website. If there are grammatical errors or low-quality images, that says something about the creators’ skill and attention to detail.
After reviewing the whitepaper and website, you should understand a project well enough to explain it to a friend. After that, it’s time to move on to the next question.
Why is cryptocurrency valuable?
You have found that the project you are investigating has a purpose. Well, if you were to buy their cryptocurrency, how much potential does it have?
Take Ether (ETH) for example. It is mainly used to facilitate transactions on the Ethereum blockchain. Anyone who buys NFTs, develops apps or plays games on this blockchain has to pay transaction fees with ETH.
As more and more people started using the Ethereum blockchain, the demand for ETH would increase and so would its price. Adoption of that particular blockchain is also an important metric.
In that case, you might decide to invest in ETH now and hope to sell it for a profit in the future. There is no guarantee that this would happen, but at least there is clarity as to what ETH’s value is.
On the other hand, if you look at Dogecoin (DOGE) – a coin created as a joke – it’s harder to justify an investment. It has no inherent value, and that makes it much harder to gauge how DOGE might fare over the long term.
After you’re happy with a cryptocurrency and the value it offers, dig deeper to ensure its legitimacy.
Start with social media
What’s the first thing you would do after meeting someone on a dating app? Stalk their social media for red flags. Of course, you would try to make sure it’s the same person they say they are on their profile. This would apply doubly if the person in question seems too good to be true.
Crypto investing needs to be approached the same way – with skepticism and doubt until you’re convinced otherwise. There is a lot to learn from going through the different social media accounts of a project.
On Twitter, checking out the engagement is a good place to start. If a project has hundreds of thousands of followers but its posts hardly get any likes or comments, you might wonder if those followers are real.
If all of the comments seem spam or irrelevant, chances are they were paid for. Community has always played a big role in the crypto space and can be a good gauge of a project’s strength.
Joining a project’s Discord or Telegram group can be a great way to interact with members of the community and team. Often projects host AMA (ask-me-anything) sessions or Twitter sections where users can ask questions about current and future developments.
It can also be helpful to join third-party communities, such as B. Luno’s Telegram channel to keep up to date with developments and news related to the project you are interested in.
Beyond the project’s social media channels, you should also consider looking into the backgrounds and credentials of the founders. It is worth finding out if they have previous experience running such a business and what their track record is in the business world. LinkedIn is a good place to start as users often view testimonials from other professionals in the field.
As a rule of thumb, a project with an anonymous team is something to be wary of. While this was once a staple of the crypto space — the identity of the Bitcoin founder is still unknown — the recent proliferation of scams has turned anonymity into a red flag.
With a publicly known team, there is no guarantee that the project will be successful, but at least there is someone who can be held accountable in the event of negligence and fraud. It also means the founders are risking their reputation and are likely to invest more in the project.
Reference to competitors
After finally identifying a crypto project to invest in and completing your series of background checks, spend some time looking at how it compares to its peers.
For example, if ETH is the cryptocurrency you studied, you would find that Solana (SOL) is a close competitor. It serves a similar purpose to ETH on its own blockchain and its market cap is around $14 billion compared to ETH’s $208 billion.
By the looks of it, Ethereum has a larger user base and supports more projects, but Solana outperforms it in other areas.
Transaction fees on Solana are typically a fraction of a cent, while on Ethereum they have historically risen to over $100. The difference in fees is determined by the number of transactions each blockchain can process. Solana is capable of processing thousands of transactions per second (TPS), while Ethereum only supports around 15 TPS.
Some other criteria worth noting are transaction latency — how long each blockchain takes to process transactions — and the number of validator nodes. A validator is someone who verifies the legitimacy of a blockchain transaction. More validators make a blockchain more decentralized and secure.
There is no clear winner here as both blockchains have their pros and cons. Some may think investing in ETH seems safer since it is the second largest cryptocurrency and relatively less volatile. On the other hand, others might feel that SOL has more room for growth and could potentially offer higher returns.
You could go further down the list and find the NEAR protocol (NEAR) which only has a market cap of $3 billion. Unlike ETH and SOL, it has a limited supply – it will never exceed 1 billion NEAR coins in circulation. Although NEAR’s transaction fees are even lower than Solana’s, transaction times are about five times slower.
Once you have identified these factors, it is up to you to weigh them accordingly and make a decision based on your investment strategy, risk tolerance and desired outcome.
If you find a competing cryptocurrency more attractive, repeat your due diligence the same way you did the first time. This may seem like a time-consuming process, but this is what separates investing from gambling. It’s important to know exactly what you’re buying in order to have a balanced portfolio that suits your investment needs.
To learn more, stay tuned for our latest installment where we cover 10 free tools that can better guide you in your crypto journey. In the meantime, you can also head to Luno Discover for daily crypto updates and follow Luno’s Telegram channel and Instagram for small doses of blockchain news and knowledge.
This article is part of a six-part series on a no-hype crypto beginner’s guide. You can see the other articles here:
– Part 1: Blockchain and Cryptocurrencies
– Part 2: Coin types and their risks
– Part 3: NFTs, DeFi and Metaverse
– Part 4: Stablecoins
This article was written in collaboration with Luno.
This partnership between Vulcan Post and Luno is for educational purposes only. Luno Singapore has been approved in principle by the Monetary Authority of Singapore (MAS) under the Payment Services Act 2019. Cryptocurrency is a risky investment. The value of the cryptocurrency can fluctuate significantly and you can lose the invested capital. Before investing, we strongly recommend that you educate yourself about cryptocurrencies and become familiar with the risks involved, which are described in Luno’s risk warning.
Selected photo credit: The Fintech Times