Beginner’s guide to crypto: How to DYOR

‘Do your own research’ or ‘DYOR’ has become one of the commandments of the crypto space, and for good reason. It is a sentiment that is repeated in the Discord communities and Telegram groups.

With hundreds of projects, some legitimate, some less so, trying to gain attention and attract investment, all cryptocurrency users have a responsibility to protect their funds and ensure they are well positioned to make informed decisions.

It’s easier said than done, especially when you don’t know where to start.

From 2021, more $575 million worth of crypto has been lost as a result of bogus investment scams. People are often attracted to projects that promise high returns and fail to analyze the real value on offer.

While there is risk involved with any investment in crypto, it can be mitigated by being aware of the red flags and knowing whether or not to believe what you read.

Beyond knowing the facts, it’s also important to diversify your investments and build a portfolio that matches your risk profile. From earning interest on stablecoins to speculating with NFTs, there are several ways to gain exposure to the crypto space. It is important to consider the risks and benefits associated with these different options and find the right balance.

In this edition of our beginners guide to crypto in collaboration with Lunawe will study the idea of ​​’DYOR‘ and establish what it really means to properly research a crypto project. After all, it always gives you an advantage to know what you’re investing in.

Why does the crypto project exist?

This is the first question that needs an answer.

Most crypto projects publish a whitepaper 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 technical document must be clear and easily understandable. If you find yourself reading one and not making sense of it, it could be a possible red flag. That said, it’s key to also increase your fundamentals to better understand and connect the dots: our 6 part beginners guide to encryption it’s a great start.

Fraudulent projects can create a white paper full of buzzwords, like Web3, metaverse, and DeFi – without really explaining what the project does. They trust unsuspecting investors to buy their cryptocurrency without understanding its underlying value.

Along with the contents, it is also important to look at the branding and layout of the document. If the whitepaper sounds a lot like a high school student’s PowerPoint presentation, it’s probably best to be extra cautious.

This also applies to the project website. If there are grammatical errors or low-quality images, that tells you something about the project founders’ competence and attention to detail.

Once you’ve reviewed 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 on to the next question.

Why is cryptocurrency valuable?

You have established that the project you are investigating has a purpose. Now, if you were to buy your cryptocurrency, how much potential does it have?

Take Ether (ETH), for example. It is mainly used to facilitate transactions in the Ethereal block chain. Anyone who buys NFTs, develops apps, or plays games on this blockchain must pay transaction fees using ETH.

Some of the applications built on top of the Ethereum blockchain / Image Credit: The Block Research

If more and more people started using the Ethereum blockchain, the demand for ETH would increase and so would its price. The adoption of that particular blockchain is also an important metric.

In this case, you could choose to invest in ETH right now and hope to sell it in the future for a profit. There is no guarantee that this will happen, however, at least there is clarity on what the value of ETH is.

On the other hand, if you look at Dogecoin (DOGE), a coin that was created as a joke, it is more difficult to justify an investment. It has no inherent value, and this makes it much more difficult to assess how DOGE might perform in the long run.

After being satisfied with a cryptocurrency and the value it offersdeepen to guarantee its legitimacy.

Get started with social media

What is the first thing you would do after meeting someone on a dating app? It stalks their social networks in search of red flags. Naturally, they will try to make sure that you are the same person that you claim to be on your profile. This would go doubly true if the person in question seems too good to be true.

Investments in cryptocurrencies should be approached in the same way: with skepticism and doubts, until you are convinced otherwise. Much can be learned by reviewing the different social media accounts of a project.

On Twitter, looking at 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 be wondering if these followers are real.

With a similar effect, if all the comments appear to be spam or irrelevant, they are likely to have been paid for. The community has always played an important role in the crypto space and can be a good indicator of the strength of a project.

squid game token
A screenshot of the Squid Game Token website, which scammed users out of over $3 million in 2021

Joining a project’s Discord or Telegram group can be a great way to interact with community and team members. Projects can often host ask me anything (AMA) sessions or Twitter feeds where users can ask questions about current and future developments.

It may also be useful to join third-party communities, such as Luno’s Telegram Channelto keep abreast of the developments and news of the project that interests you.

Beyond the project’s social media channels, also consider researching the background and credentials of the founders. It is worth finding out if they have previous experience of running such a company and what their track record is in the business world. LinkedIn is a good place to start as users often show references from other professionals in the space.

As a general rule, a project with an anonymous team is something to watch out for. Although this was once a staple of the crypto space (the identity of Bitcoin’s founder is still unknown), the prevalence of scams in recent times has made anonymity a red flag.

With a team that is publicly known, there is no guarantee that the project will succeed, but at least there is someone to hold accountable in case of negligence and fraud. It also means that the founders are risking their reputations and are likely to invest more 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 seeing how it fares against its competitors.

For example, if ETH is the cryptocurrency you were looking for, you would find Solana (SOL) to be a close competitor. It has a similar purpose as ETH on its own blockchain and its market capitalization is around $14 billion compared to $208 billion for ETH.

As it stands, Ethereum has a larger user base and supports more projects; however, Solana surpasses him in other areas.

Transaction fees on Solana are typically a fraction of a cent, while on Ethereum they have ballooned to over US$100 in the past. The difference in fees is determined by the number of transactions 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 mentioning are transaction latency (how long it takes each blockchain to process transactions) and the number of validating nodes. A validator is someone who verifies the legitimacy of a blockchain transaction. Having more validators makes a blockchain more decentralized and secure.

Image Credit: Blockworks

There is no clear winner here as both blockchains have their pros and cons. Some might think that an investment in ETH seems safer as it is the second largest cryptocurrency and relatively less volatile. On the other hand, others may perceive that SOL has more room to grow and could potentially offer higher returns.

You can go even further down the list and find NEAR Protocol (NEAR), which only has a market capitalization of US$3 billion. Unlike ETH and SOL, it is in limited supply: there will never be more than 1 billion NEAR coins in circulation. Although NEAR’s transaction fees are even lower than Solana’s, their transaction times are about five times slower.

After identifying 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 to be more attractive, be sure to repeat your due diligence just as you did the first time. This may seem like a time-consuming process, but that’s what separates the investment from the game. Knowing exactly what you’re buying is essential to having a well-balanced portfolio that meets your investment needs.

To learn more, stay tuned for our final issue, where we’ll discuss 10 free tools that can better guide you through your crypto journey. In the meantime, you can also go to Moon Discover for daily crypto updates, and follow Luno’s Telegram Channel Y Instagram for small doses of blockchain news and knowledge.

This article is part of a six-part series of a no-hype beginner’s guide to crypto. You can check the other articles here:

Part 1: Blockchain and cryptocurrencies
Part 2: Types of currencies and their risks
Part 3: NFT, DeFi and the metaverse
Part 4: Stablecoins

This article is written in collaboration with Luno.

This partnership between Vulcan Post and Luno is for educational purposes only. Luno Singapore has received approval in principle from the Monetary Authority of Singapore (MAS) under the Payment Services Act 2019. Cryptocurrency is a high-risk investment. The value of the cryptocurrency may fluctuate significantly and you may lose the capital you invest. Before investing, we urge you to educate yourself on cryptocurrencies and familiarize yourself with the risks involved, which are detailed in Luno Risk Warning.

Featured Image Credit: The Fintech Times