‘Do your own research’ or ‘DYOR’ has emerged as one of the commandments of the crypto space, and for good reason. It’s a sentiment echoed across Discord communities and Telegram groups.
With hundreds of projects — some legitimate, others not so much — trying to gain attention and attract investments, all crypto users have the responsibility to protect their funds and ensure they are well-positioned to make informed decisions.
This is easier said than done, especially when you don’t know where to start.
Since 2021, over US$575 million worth of cryptocurrency have been lost as a result of fake investment scams. People are often lured in by projects promising high returns and fail to look into the actual value being offered.
While there’s risk involved with any crypto investment, it’s possible to mitigate this by being aware of red flags and knowing whether or not to believe what you read.
Beyond knowing the facts, it’s also important to diversify investments and build a portfolio which matches your risk profile. From earning interest on stablecoins to speculating on NFTs, there are a number of ways to gain exposure to the crypto space. It’s important to consider the risks and rewards associated with these different options and find the right balance.
In this edition of our beginner’s guide to crypto in partnership with Luno, we’ll look into the idea of ‘DYOR’ and lay down what it actually means to properly research a crypto project. After all, it always puts you in an advantage to know what you are investing in.
Why does the crypto project exist?
This is the first question which you need answered.
Most crypto projects release a whitepaper outlining their purpose, vision, and roadmap. This document is specifically created for prospective investors and can usually be found on a project’s official website.
A whitepaper is meant to be clear and easily understandable. If you find yourself reading one and can’t make sense of it, that can be a potential red flag. That being said, it is key to also bulk up your fundamentals to better understand and connect the dots – our six-part crypto beginner’s guide is a great start.
Fraudulent projects might put together a whitepaper full of buzzwords – such as Web3, metaverse, and DeFi – without actually explaining what the project does. They rely on unsuspecting investors to buy their cryptocurrency without understanding its underlying value.
Along with the contents, it’s also important to look at the branding and design of the document. If the whitepaper closely resembles a middle schooler’s PowerPoint presentation, it’s probably best to be extra cautious.
This applies to the project’s website as well. If there are grammatical errors or low-quality visuals, that tells you something about the project founders’ competence and attention to detail.
Once you’ve gone over the whitepaper and website, you should understand a project well enough to be able to explain it to a friend. After this, it’s time to move to the next question.
Why is the cryptocurrency valuable?
You’ve established that the project you’re looking into has a purpose. Now, if you were to buy its cryptocurrency, how much potential does it have?
Take Ether (ETH), for example. It is primarily used to facilitate transactions on the Ethereum blockchain. Anyone buying NFTs, developing apps, or playing games on this blockchain needs to pay transaction fees using ETH.
If more and more people were to start using the Ethereum blockchain, the demand for ETH would increase, and so would its price. Adoption of that particular blockchain is an important metric too.
In this case, you could choose to invest in ETH right now and hope to sell it in the future for a profit. There’s no guarantee that this would happen, however, at least there’s clarity around what ETH’s value is.
On the other hand, if you look at Dogecoin (DOGE) – a coin which was created as a joke – it’s tougher to justify an investment. There’s no inherent value to it, and this makes it a lot tougher to gauge how DOGE might perform in the long term.
After you’re satisfied with a cryptocurrency and the value which it offers, dig deeper to ensure its legitimacy.
Start with the socials
What’s the first thing you’d do after meeting someone on a dating app? Stalk their social media for red flags. Naturally, you’d try to make sure they’re the same person as whom they claim to be on their profile. This would apply doubly so if the person in question seems too good to be true.
Crypto investments need to be approached the same way – with scepticism and doubt, until you’re convinced otherwise. There’s a lot that can be learnt by going through a project’s different social media accounts.
On Twitter, looking at the engagement is a good place to start. If a project has hundreds of thousands of followers, but its posts barely get any likes and comments, you might wonder if these followers are even real.
To a similar effect, if all the comments seem to be spam or irrelevant, chances are that they were paid for. Community has always played a big role in the crypto space, and it can be a good gauge of a project’s strength.
Joining a project’s Discord or Telegram group can be a good way to interact with members of the community and the team. Often, projects might host ask-me-anything (AMA) sessions or Twitter Spaces where users can ask questions about current and future developments.
It can also be helpful to join third-party communities, such as Luno’s Telegram channel, to stay updated on developments and news on the project you’re interested in.
Beyond the project’s social media channels, also consider looking into the backgrounds and credentials of the founders. It’s worth finding out whether they have prior experience running such a venture and what their track record looks like in the business world. LinkedIn is a good place to start as users often display references from other professionals in the space.
As a rule of thumb, a project with an anonymous team is something to stay wary of. Even though this was once a staple of the crypto space – the identity of the Bitcoin founder is still unknown – the prevalence of scams in recent times has turned anonymity into a red flag.
With a team that’s publicly known, there’s no guarantee that the project will succeed, but at least there’s someone to hold accountable in case of negligence and fraud. It also means that the founders are putting their reputation on the line and are likely to be more invested in the project.
Reference against competitors
Finally, after identifying a crypto project to invest in and completing your series of background checks, spend some time looking at how it fares against its competitors.
For example, if ETH is the cryptocurrency you were looking into, you’d find that Solana (SOL) is a close competitor. It serves a purpose similar to ETH on its own blockchain and its market cap is around US$14 billion as compared to ETH’s US$208 billion.
As it stands, Ethereum has a larger user base and supports more projects, however, Solana outperforms it in other areas.
Transaction fees on Solana are usually a fraction of a cent, whereas on Ethereum, they’ve shot up to over US$100 in the past. The difference in fees is determined by the number of transactions which each blockchain can handle. Solana is capable of handling thousands of transactions per second (TPS), while Ethereum only supports around 15 TPS.
Some other criteria worth noting are transaction latency – how long it takes each blockchain to process transactions – and the number of validator nodes. A validator is someone who verifies the legitimacy of a blockchain transaction. Having more validators makes a blockchain more decentralised and secure.
There’s no clear winner here as both blockchains have their pros and cons. Some might think an investment in ETH seems safer as it’s the second biggest cryptocurrency and relatively less volatile. On the other hand, others may perceive SOL to have more room for growth and could potentially offer higher returns.
You might go even further down the list and find NEAR Protocol (NEAR), which only has a market cap of US$3 billion. Unlike ETH and SOL, it has a limited supply – there’ll never be more than one billion NEAR coins in circulation. Although NEAR’s transaction fees are even lower than Solana, its transaction times are about five times slower.
After identifying these factors, it’s 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 to be more appealing, make sure to repeat your due diligence just as you did the first time around. This might seem like a time-taking process, but that’s what separates investing from gambling. It’s essential to know exactly what you’re buying into, in order to have a well-balanced portfolio that meets your investing needs.
To learn more, stay tuned for our final edition where we’ll look into 10 free tools which can better guide you along your crypto journey. In the meantime, you can also head over 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 to a no-hype beginner’s guide to crypto. You can check out the other articles here:
This article is written in collaboration with Luno.
This partnership between Vulcan Post and Luno is for educational purposes only. Luno Singapore has been awarded in-principle approval from the Monetary Authority of Singapore (MAS) under the Payment Services Act 2019. Cryptocurrency is a high-risk investment. The value of cryptocurrency can fluctuate significantly and you may lose the capital you invest. Before investing, we urge you to educate yourself about cryptocurrencies and to familiarise yourself with the risks involved, which are detailed in Luno’s Risk Warning.
Featured Image Credit: The Fintech Times