How to Do Your Research Before Investing In Cryptocurrencies
‘Do your own research’ (DYOR). This phrase has become an empty platitude within the crypto ecosystem. It is something that prominent figures repeat to absolve themselves of any liability if a trader, having been encouraged into investing in cryptocurrency, loses significant sums of money.
‘Do your own research’ (DYOR), despite how often it may be misused and overused, does highlight several crucial truths regarding (cryptocurrency) investing. In this post, we break them down in terms of relevance, describing why they're important and how the typical retail trader might take advantage of them.
Of course, no amount of your research can help when the market goes through a downturn, meaning that understanding cycles is just as important as researching individual cryptocurrencies and platforms.
How to Do Your Research When Investing in Cryptocurrency
Here’s a look at some significant starting points for researching prospective cryptocurrencies. This list is by no means exhaustive (the subject of DYOR is inexhaustible) but should serve as a good starting point for anyone looking to get involved with crypto. So then, how do you do your research in crypto?
Obtain Reliable Transaction and Usage Data
A helpful analogy in cryptocurrency investing is that purchases of any coin are bets on its future value. In other words, if you’re betting that a cryptocurrency and its blockchain will be significantly more prominent and valuable in the future, it’s a good idea to find reliable evidence to support this bet.
There are various sources of data that can help traders determine whether a blockchain is growing.
For example, Messari (as well as some other cryptocurrency research and investment firms) produces a regularly updated table that tracks on-chain activity for various major blockchains and crypto platforms. As shown below, it tracks 24-hour volume as recorded by significant blockchains.
Messari’s Chain Activity table tracks 24-hour transaction volume on significant blockchains. Source: Messari
The table above highlights an important lesson you must learn when using data to ‘do your own research.’ The table contains two transaction volume columns: ‘Transaction Volume’ and ‘Adjusted Transaction Volume.’ Only one of these — ‘Adjusted Transaction Volume’ — is meaningful since it was filtered to exclude ‘spam’ transactions that don’t involve transfers between real people.
A similar rule of thumb applies to various other kinds of data. As another example, the table above also includes a ‘Real Volume’ column, which focuses on the ‘real’ trading volume of a given cryptocurrency on significant exchanges (i.e., reported trading volume minus potential ‘wash’ trades). While the Messari chart includes only a ‘real’ metric for trading volume, you need to be mindful when using other trading/transaction data sources that may be looking at unreliable or misleading numbers.
Consider Total Value Locked (TVL)
Aside from on-chain and exchange-based trading data, several other valuable information are available for blockchains to help you make the right decisions.
One is the Total Value Locked in the blockchain, which indicates the value of the total amount of cryptocurrency staked or locked into all protocols based on a given blockchain (concerning that blockchain). The higher this number is, the more DeFi-related activity a blockchain sees, with Ethereum currently leading the rest of the cryptocurrency ecosystem by a wide margin, according to DeFiLlama. The more activity a chain is, the more likely it is to gain popularity, as more projects would be looking to build on the chain.
User numbers are another critical metric. The exact form this takes can vary from platform to platform, with ‘pure’ cryptocurrencies such as Bitcoin having active addresses (individuals are identified by their wallets on the chain) and some gaming platforms (e.g., Axie Infinity) having active users. A good source of address data (for major cryptocurrencies) is BitInfoCharts, while users may need to explore data online (e.g., via a search engine) for specific platforms.
Lastly, many blockchain platforms also publish (often via Twitter) data and infographics on the size of their ecosystems, i.e., how many apps are built or are building on their networks. What’s vital to note about such data is that they are often forward-looking, in that some platforms can have hundreds or thousands of apps building on them without much actual use yet (because these apps are still in development). Still, when combined with evidence on whether actual use is growing, ecosystem counts can be a good indicator of how prominent a platform may be in the future.
Data on Market Liquidity
Associated with usage data is market data. In particular, if you are looking for a new cryptocurrency to buy, you need to check that it is listed on various reputable exchanges (think Binance, Coinbase, Huobi, etc.) You should also check whether a coin’s market is liquid (by checking its trading volume on platforms like CoinMarketCap) and whether the coin exhibits organic price/volume patterns.
For the most significant coins, such as Bitcoin, Ethereum, Binance Coin, and others, there’s going to be little doubt that most exchanges list them. However, many newer coins are often listed on only one or two obscure trading platforms, making them highly illiquid and ripe for manipulation by unscrupulous big players (whales).
Such coins are detectable via their price data, which you can view on CoinGecko and CoinMarketCap (and similar sites). However, as shown in the image below, illiquid coins tend to have their prices move up and down steeply, offering a kind of jagged ‘sawtooth’ pattern that suggests artificial trading (e.g., bots).
Look Out For Reputable Experts and Developers
No — and we mean ‘no’ — analyst is an accurate predictor of what will happen in the future. However, it is always worth paying attention to analysts who support their views with good fundamental analysis and have a decent enough track record.
This means ignoring celebrities and influencers who do not have much substance beyond their hype and considering the opinions of people who have been in crypto for a while and have their reputations to lose if they make wrong forecasts. Of course, this doesn’t mean going solely on what an expert or analyst says but using their pronouncements to narrow and direct your field of research. It’s also worth paying attention to the developers developing blockchain intelligent contracts and various platforms. Such people often shed valuable light (for the layperson) on the technical defects of particular protocols or chains, helping you understand whether a hyped network is or isn’t all it’s made out to be.
Understand Market Cycles
Finally, you must understand that you can’t research your way out of a market downturn. Sometimes, the entire market nosedives (as it has been doing for the past few months), so no research can help you identify a cryptocurrency that will secure consistent returns in such situations.
You may have to wait out bear markets and see how things pan out. Nonetheless, it is always worth continuing research to identify the coins you may invest in once the market and macroeconomic conditions become more favorable. On top of this, it’s always worth paying attention to the broader market and economic conditions so that you always have a good idea of when the market could become bullish or bearish.