🎧 The article is also available in an audio version. Give it a listen at the bottom of the article 🎧

‘Do your own research’ (or DYOR). Within the crypto community, this phrase has become an empty platitude, although it is one of the greatest pieces of advice in crypto. It is something that prominent industry 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”, despite how often it may be misused or overused, does emphasize several crucial truths regarding (cryptocurrency) investing. Before investing in any cryptocurrency, when you think of DYOR, think of yourself as a factory newbie who is about to operate a sophisticated, hazardous piece of machinery in the factory. DYOR is the user manual that will reduce the chances of getting hurt by the sophisticated, shark-infested waters of crypto. 

It is important to note that 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. That said, how do you know which cryptocurrencies to invest in?

How to Do Your Research When Investing in Cryptocurrency

Here’s a look at some important starting points for researching which cryptocurrencies are viable to invest in. This list is by no means exhaustive (the subject of DYOR is inexhaustible), neither are the points in any particular order. However, the points therein should serve as a good starting point for anyone looking to get involved with crypto. So then, how do you do your research before investing in cryptocurrencies?

Obtain Reliable Transaction and Usage Data For The Specific Coin/Blockchain

A helpful analogy in cryptocurrency investing is that purchases of any coin or token are bets on its future value. In other words, if you’re betting that a cryptocurrency and its blockchain (where applicable) will be significantly more prominent and valuable in the future, it is a good idea to find reliable evidence to support this bet.

There are various sources of data that can help traders and/or potential investors determine whether a blockchain is growing.

For example, Nansen, Messari, Chainalysis, Dune Analytics, as well as some other cryptocurrency research and investment firms, produce regularly updated tables that track on-chain activity for various major blockchains and crypto platforms. As shown below, this table from Messari 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 a crucial lesson you must learn when using data to do your own research: not everything is as it appears. The table contains two columns for transaction volume data: ‘Transaction Volume’ and ‘Adjusted Transaction Volume.’ Only one of these — ‘Adjusted Transaction Volume’ — is significant since it was sifted to exclude ‘spam’ transactions that don’t involve transfers between real people.

A similar rule of thumb applies to various other kinds of data you may want to measure. The table above also includes a ‘Real Volume’ column, which focuses on the ‘real’ trading volume of a given cryptocurrency on prominent crypto 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 relying on unreliable or misleading numbers.

Consider Total Value Locked (TVL)

Aside from on-chain and exchange-based trading data, several other valuable pieces of information are available for blockchains to help you make the right decisions.

One is the Total Value Locked in the blockchain upon which the project is built, 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 figure is, the more DeFi-related activity a blockchain sees, with Ethereum currently far ahead of the rest of the cryptocurrency ecosystem, according to DeFiLlama. The more activity a chain sees, the more useful or reliable it is, which makes it more likely to gain popularity (and more investment), as more projects would be looking to build on the chain. 

On-chain and off-chain user numbers are another vital metric. The exact form this metric takes can vary from platform to platform, with pure cryptocurrencies such as Ethereum having active addresses (individuals are identified by their wallets on the chain) and some gaming platforms (e.g., The Sandbox) having active users. A good source of wallet address data (for major cryptocurrencies) is BitInfoCharts, while you may need to explore data online (e.g., via a search engine or the project’s social channels) for specific platforms.

More often than not, specific projects put forward 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 usually forward-looking, in that some platforms can have hundreds or thousands of apps building on them without much actual use at the time of publishing, because these apps are still in development. Still, when combined with evidence on whether actual use is growing, ecosystem counts can be a fairly good indicator of how recognized a platform may be in the future.

Source: Captain Altcoin

Search Out Data on Market Liquidity

When doing your research, market data is associated with usage data. In particular, if you are looking for a new cryptocurrency to invest in, you need to check that it is listed on various reputable exchanges (think Binance, Coinbase, Huobi, etc.) You should also check whether such a coin’s market is liquid (by checking its trading volume on platforms like CoinMarketCap or CoinGecko) and whether the coin exhibits organic price/volume patterns.

For the most significant coins, such as Bitcoin, Ethereum, Avalanche, Binance Coin, and others, there’s going to be little doubt that most exchanges list them. However, many newer and lesser coins and tokens are often listed on only obscure trading platforms, making them highly illiquid and ripe for manipulation by unscrupulous big players (whales).

Such cryptocurrencies are detectable via their price data, which you can view on CoinGecko and CoinMarketCap (or similar sites). 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) or other nefarious price manipulations.

An example of the price patterns of an illiquid coin. Source: CoinMarketCap

Look Out For Reputable Experts and Developers

No — and I mean ‘no’ — analyst is an accurate predictor of what will happen in the future with a cryptocurrency. However, it is always worth paying attention to analysts who support their views with good fundamental and technical 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 views of people who have been in crypto for a long while and have their reputations on the line if they make wrong forecasts. This doesn’t mean going solely on what an expert or analyst says but using their pronouncements to narrow and direct your research. 

It’s also worth paying attention to the developers behind blockchains’ intelligent contracts and various platforms. They often shed 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 has been made out to be.

Understand Market Cycles

Finally, you should understand that you cannot research your way out of a market downturn or a full-blown bear market. Sometimes, the entire market can nosedive (as it has been doing for the past few months), so no amount of 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 turn out. Alternatively, you may want to invest during bear markets to maximize profits when the bull market returns. Nonetheless, it is always worth continuing research to determine the coins you may invest in once the market and macroeconomic conditions become more favorable for investment. 

 Social Media Is Helpful When DYOR

This part will depend on your preferred source, but if you want to have someone explain it to you simply, give the project a search on YouTube and see if any reputable channels have covered what it’s all about. From there you might want to look up the project on Twitter to see if there have been any recent or significant developments. 

If you’re still interested in the project, dive into Reddit/Facebook/Telegram groups for some community discussion on the project and its trajectory. A lack of discussion on a coin/project may be a red flag as most solid projects will have their die-hard supporters.

As you research, note down any doubts and ask any questions you might have, and assess whether it is the type of project your investment portfolio needs. Keep in mind that information in crypto is extremely time-sensitive, so make sure every piece of information you gather is recent and get a few different opinions.

Final Words: DYOR is a Continuous Process

The monitoring of a cryptocurrency project that you have added to your portfolio is a never-ending process. Given how quickly things change in the world of crypto, you as an investor need to stay informed about things like project milestones, changes or additions to development teams, announcements, and possible external threats from competing projects or changes in the regulatory environment. You also need to keep track of vulnerabilities in the tech, as hacks and thefts have become rampant in the industry.

If you have invested in a lesser-known cryptocurrency, staying up to date on news and important announcements is key to understanding why price fluctuations occur and whether the coin you have invested in is going to pump or dip in the near future.

This article is written by Chidera Anushiemas a part of enter.blog's bounty program. Do you have an interesting topic, series or subject you think would be fitting for enter.blog? 

You can now submit your articles to enter.blog and get paid for your contributions!
Read more and submit your article here.