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Why and How to Do Your Own Research (DYOR) When Investing in Crypto

2022-06-23

Main Takeaways

  • Do your own research, or DYOR, is a common phrase within the crypto community.

  • DYOR often involves digging into the fundamentals of a project before committing money to it.

  • Find out why doing your own research is essential and how experienced investors do their due diligence.

Do your own research, or DYOR, is a common phrase used in crypto investing and trading content. Learn why and how people DYOR.

Perform your due diligence. Remember to do your own research. DYOR. It’s everywhere in the crypto space. But what exactly does “doing your own research” entail, and how are people doing their due diligence? From this article, you will find out why you should always DYOR before investing and how to go about researching the project that has caught your interest.

Before doing a deep dive into a project you’re looking at, it’s best to get familiar with crypto terms, practices, and sectors (DeFi, NFTs, GameFi, etc.) to understand the market in which you might be investing. Binance Academy is a free educational platform for new and experienced investors to find detailed information covering many key aspects of the crypto and blockchain industry. 

What Is DYOR?

Do your own research, or DYOR, as popularized by crypto enthusiasts, is a common phrase used in crypto investing and trading. The idea behind this term is to reduce the number of uninformed investors by encouraging users not to follow the word of others blindly. Any new projects or areas of interest should be subject to a significant amount of research before being considered for investment.

Investors can look into various essential areas when researching a project. The team members and their track record and background, the project roadmap, previous successes and failures, and community engagement are all valuable initial areas to explore. It's good practice to cross-reference relevant details from several reputable sources. Thorough research helps assess the validity and potential of a project before investing, so let's take a closer look into some key criteria on which you can assess crypto projects. 

It’s important to note that even the most rigorous DYOR is not a remedy for all ills. Due to the volatility of crypto markets, DYOR does not eliminate the risk of a bad investment; it can only help to assess the probability of a project succeeding and get a better understanding of the levels of risk involved.

Why Is There a Need for DYOR?

The main reason for doing research is to practice responsible trading and disciplined thinking to minimize risk. It would be akin to gambling if one were to invest a lot of money in a product without knowing anything about it. Let’s look at some of the main reasons that investors are advised to DYOR.

Research vs. risk 

DYOR allows individuals to mitigate the risks of irrational decision-making when investing in crypto. Here we will look at a couple of areas where thorough research could help avoid a bad investment. Market sentiment, for example, can cause traders to get into an asset out of FOMO (fear of missing out). When the market is going up, some investors can be caught up in the hype, buying based on the fear of missing an opportunity. Without thorough research, investors are more likely to incur financial losses after buying assets at elevated rates.

Likewise, when there is FUD (fear, uncertainty, and doubt), investors may panic sell based on the influence of commentators and investors on social media. The so-called “Weak hands” tend to panic when the market starts to dip and communal negativity increases. Without proper research, investors are more likely to sell their assets at a loss when they get influenced by negative market sentiment.

In addition, some tactics used by bad actors in the crypto space are designed to prey on inexperienced investors — or those who haven't conducted disciplined research.

Sybil attacks 

A Sybil attack is an attempt by malicious actors to gain influence over a network through an onslaught of fake identities. This type of attack can apply to a few areas of crypto, but in this example, we'll focus on how it could sway investor decisions. 

Fraudsters could create multiple social media accounts to discuss a project or asset. They would attempt to hype a project up by creating an illusion of community engagement and initiating discussions with real social media users. The discussion is then bolstered by the additional network of social media accounts under the bad actor's control. This can create a false impression that many people are excited about the project. If a potential investor hasn’t done thorough research on the fundamental project that’s being promoted this way, they could be swayed to invest in an asset that has little real value.

Shilling

To increase product awareness, hype and discussion, some projects rely on various techniques of shilling their digital assets. Multiple people are incentivized to hype up or shill the project through social media and community channels. Projects or assets looking to shill can sometimes engage prominent online commentators and influencers to use their platform and promote it to their audiences. Susceptible traders could be drawn to the hype, especially since shilling is often presented as a genuine recommendation by someone they follow. It doesn't usually appear as advertising or promotion and can be rather subtle. For example, such promotion can be inserted as part of a discussion or product review. Investors relying on the influencer’s opinion rather than their own research could be convinced to buy into a questionable asset.

The helpful reminder 

DYOR is there to remind everyone that investments are only as good as the research that goes into them — and even then, there is no guarantee of success. Risks represent the natural cost of capital gains opportunities that investment activity offers. The best investors can do is equip themselves with enough knowledge and research to assist in effective decision-making and reduce risks.

How Do You Research Crypto? Common Ways to DYOR 

Now that we’ve established why DYOR is important, let’s look at some methods traders and investors use to conduct proper research.

  1. The role of fundamental analysis in DYOR

  2. Analyze project whitepapers

  3. Research the numbers 

  4. Find reputable voices 

  5. Pursue crypto literacy with Binance Academy

  6. Hire a professional financial advisor

The role of fundamental analysis in DYOR

Doing your own research is about digging deeper into a project. This is closely related to fundamental analysis (FA), a term used within the financial world to determine an asset or business’ intrinsic value. In traditional financial markets, FA is often used to analyze potential investment opportunities, along with other market analysis approaches like technical analysis (TA) and market sentiment analysis.

Analyze project whitepapers

It’s a good habit for traders and investors to go straight to the source and read a project’s whitepaper, concept paper, website, and other marketing materials. A whitepaper is an authoritative document usually written by a project team to pose a problem and explain how their product, technology, or token can solve it. Anyone can use these sources to thoroughly assess what their mission, vision, and game plan are. What’s the gap they are trying to bridge? Is the real-world problem affecting a large population? Is the proposed solution feasible?

If the vision sounds too difficult to achieve while no clear path to achieving it is offered, it could be a sign of an overly ambitious project that is less likely to deliver on its promises.

Research the numbers 

The numbers surrounding the project and its digital asset can give investors a wealth of information. For instance, the project's social media and community channel numbers could be a good indicator of how popular it is. Still, beware of bots and fake accounts, as these could give an inaccurate impression of how other people perceive the project and its products. How engaged is the community? Is the conversation active and natural? There are tools available to check whether a social media account's follower numbers are valid or not.

Asset price, market capitalization, circulating supply, total supply, daily active users, token holder distribution, and 24-hour trading volume can all provide great insights. By researching these numbers, you can evaluate other investors’ and users’ activity over time. You can also combine these with elements such as roadmap milestones and marketing plans to get a broader perspective.

Many projects will release details of their tokenomics when they launch. These can outline how the project’s tokens will be distributed and what incentives exist to reward the community’s activity. Tokenomics can also feature compelling details such as founder and team vesting.

Most blockchains record all transactions publicly, and anyone can view them using block explorers. On-chain data aggregators such as Glassnode and IntoTheBlock can also help reveal additional information about asset metrics.

Find reputable voices 

Many crypto-related sources in mainstream and social media are competing for attention. When relying on such channels for commentary and context, research on those channels can be as helpful as the research on the project itself. Where do they derive their experience from? How established are they? Is the information objective and unbiased?

Pursue crypto literacy with Binance Academy

Many of the links in this article lead to Binance Academy, a hub of free crypto and blockchain education. Binance Academy has a glossary of crypto keywords and a library of topics for anyone looking to improve their crypto literacy. Besides touching on NFTs, the metaverse, and other fundamental crypto topics, there’s also a selection of intermediate and advanced articles.

Fancy yourself a crypto expert? Take the Bitcoin History quiz, Glossary quiz, or Phishing quiz to see if you can get all the answers right!

Hire a professional financial advisor

Some people hire professionals to conduct market analysis and project research for them. While this outsourcing method could help save time and effort, you should note that you’re taking a risk on a third party to do due diligence for you. 

Conclusion

The crypto market can be extremely volatile, so it's crucial to remember that no amount of research can guarantee a successful investment. To mitigate risk, investors can equip themselves with knowledge of the project they are looking to invest in. There is a lot to learn in the crypto market; the more investors improve their knowledge, the better it will assist in wise decision-making. In the spirit of responsible trading, consider doing your own research with sources like Binance Academy.

Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation.