DYOR Crypto Investors’ Guide to Doing Your Own Research
Why is it Important?
If you’ve gone through a bull market in crypto, you know how the euphoria works. You ape into dozens of coins you know nothing about. You’re doing little to zero research. And for a while, this might work out until it doesn’t. To your surprise, some of your “investments” will go to zero. Or you sell at the wrong time because you’re not up to date with the developments happening with the specific protocols.
We’ve gone through this, just like millions of other crypto newbies. But if you haven’t given up yet, you’re probably looking for a better approach, and you’ve come to the right place. This approach requires effort, it won’t be easy, and there are no shortcuts. It can be boiled down to this — KNOW what you invest into.
The more you know about your investments, the better you will be at not letting short-term market sentiment influence your buying or selling decisions. It helps to remove emotions and build conviction. Removing emotions helps to avoid typical mistakes like “FOMO” or the fear of missing out, greed keeping you from taking profits, and fear-induced panic selling.
And knowing about your investments is not blindly following a crypto guru on Twitter. There are plenty of content creators, analysts, and media outlets providing lazy information and focusing on the business of getting clicks rather than proper analysis and education.
DYOR reminds us that investments are only as good as the research that goes into them, and even then, there is no guarantee of success. Taking complete ownership of our investments is the first step. By equipping ourselves with enough knowledge and understanding, we can evaluate the risks, which represent the natural cost of investing opportunities.
Today, 19,000 cryptos exist, and many of these altcoins frankly don’t have a promising future. So it’s essential to learn how to tell which assets are worth your time and money. In this guide, you will learn effective ways to evaluate crypto projects so you can invest with more confidence.
@Adam Reeds, founder, and CEO of Ledn, a crypto-backed lending firm, is just one of many involved in this industry that believes a significant number of institutions would like to invest in crypto but are looking for further maturity in the markets to do so.
Due to the risk-management nature of institutions, there must be a risk profile for each investment. These kinds of risk profiles aren’t designed to be used for sectors as novel and fast-paced as the crypto industry. Many still believe the lack of regulatory clarity to provide standards and perceived certainty for traditional investors is holding them back.
Retail investors willing to put in extra work to understand this space and learn what makes a good investment have a window of opportunity.
With regulation picking up pace and institutions ready to invest, it is not too late for us to front-run big money, but this is easier said than done. Even though the innovation is promising, it is easy to lose money investing in crypto projects if you’re not careful. Investing is hard enough even when you know every bit of information you can get your hands on; flying blind is simply asking for trouble.
Don’t believe everything you read
A key component of DYOR does not blindly believe what you read or the predictions/tips you see, especially on social media or YouTubers. The crypto space is unfortunately full of lazy advice, hype, coin shilling, and sometimes straight-up pump and dump schemes. Disregard promotional articles on news sites, as they use exaggerated headlines intended to generate clicks, hype, and FOMO (fear of missing out).
Find reputable voices
When utilizing YouTube vids, articles, or any crypto-related sources for commentary and context, research on those channels can be as helpful as the research on the project. It can be very confusing to find the signal from the noise and know whom to trust. Especially early on in your investing journey, you will want to pay close attention to be able to compile go-to sources as you build trust in their work.
Ask the questions, where do they derive their experience from? Is the information mostly objective and fact-based, or do they openly disclose any conflicts of interest or biases?
Here are some good degen Twitter accounts to follow:
Token Value Accrual
Digital assets come in various structures that need to be evaluated on how well the token tracks the value provided and the success of the project, protocol, chain, or ecosystem behind it. Before digging into the technical factors affecting a cryptocurrency’s market value, focus on the problem it’s solving and where it is deriving its value. Nothing is guaranteed, but the more “real-world” uses it has, the more likely demand and value will increase.
Where to Start
You want to pick a project that you find interesting. Ideally, even one that you might want to use yourself. This way, you get more out of your time researching each project. It’s not uncommon to find a project that provides a useful service while not making a great investment, but at least you can still get value from it as a user. It’s also much easier to spend lots of time learning when it’s a topic you find interesting.
You should start with an initial high-level overview of the project. The goal in the first 30 minutes to an hour or so of researching a project should be to find any obvious or common red flags. That way, you can move on to the next; believe me, there is always another crypto to investigate. But don’t get discouraged, as most crypto projects, especially in a bear market, should not make the cut. Most won’t survive for very long without the market turning around, aren’t serious projects, are too early, or are overly ambitious.
We will cover the steps to evaluate if a crypto project is investable. After reading this and with some practice, you can customize these guidelines to meet your personalized risk tolerance or areas of expertise. You will discover what attributes are red flags for you, making the research process even more efficient. So let’s say you’ve chosen a project that looks interesting; what next?
Check their website to gain a high-level view of the project as well as the team, which should be something they are proud to share. Don’t worry about diving into the team members’/leadership credentials just yet. A website is worth checking early in the research process for red flags, like an anonymous team. With the ease of creating websites these days, there is no excuse for not having a site that provides basic information. The website should be easy-to-navigate, functional, and free of any typos. This is also where you can likely find their white paper and roadmap to save for later.
The Community
For many crypto projects, the community supporting the project can make or break a given crypto’s potential. The enthusiasm and size of the community play a significant role in their initial and ongoing success. However, sometimes, hype, greed, and the wrong incentives can distract from a project’s actual value or utility or, worse, be a sign of a cash grab. Joining social channels like Twitter, Discord, and Telegram will help you get a sense of how socially active the project is and its community. In time you will get a feel for what makes a healthy community. This is increasingly important in the early stages.
Understand the Risks
You’re probably tired of hearing this, but it must be said. Investing in the emerging digital asset industry is risky. There’s no difficulty in finding examples of what can go wrong. Whether that’s a project getting so large to reach the top ten by market cap and yet being so fundamentally experimental that it can and did spiral to effectively zero value (Luna/UST). The evolving regulatory landscape impacts prices in both directions. One example is how that has affected the price of XRP ever since their lawsuit has been ongoing (for nearly 18 months now).
The current macro-environment has an enormous amount of added downside risk to all investable assets as well as increased volatility. There is the smart-contract hack risk that has plagued the industry since the beginning. There is centralization masked as decentralized projects. This adds to regulatory crackdown exposure and opens the door for rug-pulls and bad actors to take advantage of investors not doing their due diligence or having appropriate risk management. There are plenty more risks to evaluate, including risk-management practices like position sizing within our portfolio.
Risk-to-Reward Ratio
Risk on any given investment or trade can be defined and implemented into your strategy in various ways, but this is what has worked for me. Defined as how much the price can go against you to the point that your investment thesis is proven wrong. This still leaves plenty of room for subjective conclusions to be made. Including decisions like whether or not to use a stop loss based on a certain threshold, like -10%, for example, where you exit and take your losses. This starts to get into trading and investing strategies which we covered more in a previous article, which you can find here.
Something that wasn’t covered is the risk-to-reward ratio which is simply a calculation of the potential upside in price terms divided by the potential downside. This is only something you can figure out after you have a great deal of knowledge of the asset. It requires a view of its potential and a fundamental analysis of known risks (things that could go wrong).
You can choose your downside as where your stop-loss is set if that is a part of your strategy. Otherwise, you could come up with a price that, if hit, in your eyes, would mean the project is a flop and not coming back.
Not to say that you pick this price and walk away from the investment. Investing requires continuous analysis of your thesis and tracking of any changes.
For this risk-to-reward ratio, we need to choose actual numbers to quantify the opportunity. Alternatively, the safe way to determine your risk is to simply calculate it for the price going to zero.
Borrowing from the trader’s playbook, we want to see a minimum of a two risk/reward ratio but ideally a three or higher. This is because you won’t always get a trade or investment right. You will inevitably incur some losses.
The trick is to know when you’re wrong and cut your losses by exiting. If you do this consistently, you could be wrong half the time or even more and still be profitable due to picking investments with considerable upside if they work out.
Let’s look at Bitcoin as an example. To keep it short, let’s say my thesis is that bitcoin is digital gold, a store of value, a savings technology, and on its way to matching gold’s current market cap of around eight trillion.
However, I don’t want to wait till that does or does not happen before I take my first lump sum of profits. I might want to wait at least a year to get taxed on the profits as long-term capital gains, which will be less in this case.
After doing my fundamental research and analyzing the charts, I conclude that Bitcoin will likely retest near its all-time high within a year. As you can see in the picture below, I have used the TradingView tool, long-position, which calculates my risk/reward ratio. With different outcomes as examples, I get r/r profiles of 2, 3.5, or 8.
Checklist
Whether you’re just getting started or interested in going beyond Bitcoin and Ethereum, here’s a checklist to evaluate any cryptocurrency’s long-term potential. Credit to an OG crypto YouTuber, Guy from CoinBureau (who, for us, has proven to not be a lazy shiller of coins), where this list is primarily inspired and a great resource during your research journey as well.
Market Activity — Is it economically active? Make sure it’s not a dead coin with no interest from the market. Many projects will get abandoned during the bear market, so this is a quick thing to make sure of early on. Check the trading volume, and compare it to similar size altcoins. This can be found on CoinMarketCap.com or Messari.
Initial Research — Websites are often filled with fluff and buzz words, so don’t waste your time reading everything and every page just yet. YouTube videos are a good place to start but be careful because there is a lot of misinformation as well. Ideally, the project will have its own YouTube channel, which is often the best source.
Watching interviews with the founders and taking notes should be considered the bread and butter of your research process. Take notes as you watch these, and write down any questions you have. Guy from CoinBureau also says to consider the consistency of these interviews to figure out if they are the real deal or are just making things up. Once you get a grasp of how the project got started, how it works, and how the founders are involved, you can turn your focus to things like milestones and challenges.
News and Roadmap — Are they making progress? Roadmaps, if they have one, can be vague sometimes, so watching the interviews often give you the information you’re looking for. Write down the key events you don’t know were accomplished, then check their blog or community channels to see.
Are their goals realistic? Skimming through their blog headlines can often be enough to see if they are following through on their roadmap/being true to their word, have active development, and for you to see where it’s headed. While skimming these, you can read the ones that cover significant areas you need to know, like changes to tokenomics or big partnership announcements.
Finally, check popular news sites like CoinTelegraph, Coindesk, Decrypt, etc., and search for your project. This could be a good way of getting a simplified explanation and possibly the implications of changes if you did not understand it before.
Go to the Source — Beyond looking at their website, YouTube channel, and social channels, you can look for community Q&A sessions with the key individuals involved in the project. The FAQ section on their website can also be helpful. At some point, you will want to check the team behind the project thoroughly by going to LinkedIn profiles to see if their credentials have any merit.
Reputable secondary sources — Coinmarketcap often has a quick summary of the crypto and sometimes a link to an in-depth explainer, basic token metrics, and official links for the project. Messari is useful for tokenomics but has plenty of other tools and information. Binance Research has some detailed reports on crypto projects. Another resource for fundraising information is Crunchbase.
Check out DeFiLlamma for DeFi-focused data on TVL (total value locked) across 1,700 DeFi protocols from over 130 blockchains. Token Terminal is a platform that aggregates financial data on the leading blockchains and decentralized applications, which is good for comparing competitors.
Santiment provides on-chain, social engagement, development metrics, low-latency market signals, custom Spreadsheet templates & daily insights on the cryptocurrency market. They also make data accessible via Interactive reports that let you query crypto market data with only a few clicks and see visualizations in seconds.
If the above platforms are overwhelming, don’t worry, as that is expected initially. Here’s a simple web page to see Blockchain “gas” fee data Cryptofees.info.
Double Checking — Compare and contrast important data from the secondary sources above with info from the primary source on how a given project raised its capital, tokenomics, etc. Dig through their dedicated documentation like the whitepaper and utilize search bars/table of contents or ctrl-F to search for keywords that could have the answer to any of your questions. Keywords — Tokenomics, Inflation, IDO, Consensus Mechanisms, Mining, Staking, and many others.
Use Etherscan.io to look at the token distribution (sometimes, the largest holder can be used by smart contracts for staking). If there is no way to see the top token holders for the project, consider that a red flag.
DYOR never ends
DYOR is a continuous practice, and you must keep an active eye on your portfolio. Things change quickly in the world of crypto. No project goes without its fair share of FUD (fear, uncertainty, and doubt) which can shake your conviction, leading to emotional decisions. Investors must stay informed about the project milestones (track the roadmap and make sure they progress), announcements, rising competition, and changes to core team members or founders. Expect a lot of volatility even without its isolated fundamentals changing. The better you have analyzed and understand the fundamentals, the better you will be able to make informed and unemotional decisions when prices go against you.
Summary
It will seem super hard to stay on top of things at first. There’s so much happening. There are new protocols popping up every day. But give it time, because it will take time to get to the crypto wavelength.
Once you figure out who are the gigabrains in the industry (they’re active on Twitter and share knowledge), it will get a lot easier.
It’s also important to not ape into every new thing that is shilled, but you will do that anyway when the market is hot. Just don’t blow up completely. With too many coins in the portfolio, you won’t have the capacity to stay on top of the developments happening with them.
Start with a project that is interesting to you and one that you might want to use yourself. The early stages are all about quickly finding common red flags that disqualify it.
After that, it’s more flexible, but for the sake of time, and your sanity, try not to spend too much on one aspect of the research until you have covered your basis across the board. During this phase especially, you will want to write down questions that you feel are imperative.
Once you finish that, you can focus on finding the answers to your key questions or dive into a more detailed analysis. Then you need to develop your thesis and figure out its value. What price are you willing to pay? What is the potential upside and downside (risk-to-reward ratio)?
Something not mentioned yet is to look for intelligent and honest concerns from critiques of the project as a great way to strengthen your conviction or reveal something you might have missed. All of this is before investing. It is a lot of work and time, it’s not for everyone, but that’s okay. There are investment strategies for everyone’s level of interest and time.
One crucial aspect for all investors, in the current environment especially, is the need to be nimble. The only way to do that is to increase your knowledge and understanding and put in the work; there are no shortcuts.
If history is any indication, investors are rewarded for finding things exciting to them within this emerging asset class and innovative technology. The key is sticking around long enough to get past the novice stage and through the bear markets. For more educational content on all things crypto, investing, and especially DeFi, look at Clip Finance’s previous articles, and stay tuned for many more to come!
