In the cryptocurrency space, this is a common phrase. But what exactly is meant by "conducting independent research" and how do people conduct proper due diligence? In this article, you will learn why you should always research a project before investing and how to conduct research on a project that interests you.
What is DYOR?
Do your own research, or DYOR as it is 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 blindly follow the words of others.
Any new projects or areas of interest should undergo significant research before being considered for investment.
Investors can study various important areas when researching a project.
Team members, their track record and biography, the project roadmap, previous successes and failures, as well as community involvement, are all important initial areas for study.
A good practice is to cross-reference relevant information from multiple authoritative sources. Thorough research helps assess the validity and potential of a project before investing, so let's take a closer look at some key criteria for evaluating crypto projects.
It is important to note that even the strictest DYOR is not a means to all ends. Due to the volatility of cryptocurrency markets, DYOR does not eliminate the risk of a failed investment; it can only help assess the likelihood of project success and better understand the level of risk.
Why is there a need for DYOR?
The main reason for conducting research is to practice responsible trading and disciplined thinking to minimize risk.
Investing a large sum of money in a product without knowing anything about it would be akin to gambling. Let's consider some of the main reasons why investors are recommended to conduct their own research.
Conducting research and risks
DYOR allows people to reduce the risks of irrational decision-making when investing in cryptocurrencies.
Here we will look at several areas where thorough research can help avoid unsuccessful investments.
For example, market sentiments can cause traders to invest in an asset due to FOMO (fear of missing out). When the market is going up, some investors may get caught up in the hype, buying based on the fear of missing out. Without thorough research, investors are likely to suffer financial losses after buying assets at high prices.
Similarly, when there is FUD (fear, uncertainty, doubt), investors may panic sell, based on the influence of commentators and investors on social media. So-called "weak hands" are prone to panic when the market starts to fall, and negativity in the community intensifies. Without proper research, investors are more likely to sell their assets at a loss when they fall under the influence of negative market sentiments.
In addition, some tactics used by unscrupulous players in the crypto space are aimed at deceiving inexperienced investors - or those who have not conducted quality research.
Sybil Attack
Sybil Attack is an attempt by malicious actors to negatively influence a network through fake requests or accounts. This type of attack can be applied to several areas of cryptocurrency, but in this example, we will focus on how it can affect investor decisions.
Scammers can create multiple social media accounts to discuss a project or asset. They try to inflate the project by creating an illusion of community participation and initiating discussions with real social media users. The discussion is then reinforced by an additional group of social media accounts controlled by the malicious actor. This can create a false impression that many people are excited about the project. If a potential investor has not thoroughly researched the fundamental aspects of the project being promoted in this way, they may be inclined to invest in an asset that has no real value.
Shilling
To increase awareness of their product, some projects use various methods to "shill" their digital assets. Many project leaders intentionally inflate or advertise their project through social media and community channels. Projects or assets looking to promote themselves may sometimes attract well-known bloggers and influential personalities to use their platform and promote the project to their audience. Responsive traders may be drawn to the hype, especially since "shilling" is often presented as a genuine recommendation from someone they follow. This usually does not look like advertising or promotion and can be quite native. For example, such promotion can be inserted as part of a product discussion or review. Investors who rely on the opinion of an influential person rather than their own research may be convinced to buy a questionable asset.
It is worth reminding
DYOR reminds everyone that investments are only as good as the research done, and even then, there is no guarantee of success. Risks are a natural price for the capital growth opportunities provided by investment activities. The best thing investors can do is arm themselves with sufficient knowledge and research to help make effective decisions and reduce risks.
How to study cryptocurrency? Popular DYOR methods.
Now that we've established why DYOR is important, let's look at some methods that traders and investors use to conduct proper research.
The role of fundamental analysis in DYOR
Analyze project whitepapers
Study the numbers
Find authoritative opinions
Increase crypto literacy with Binance Academy
Hire a professional financial consultant
The role of fundamental analysis in DYOR
Conducting your own research involves delving into the project. This is closely related to fundamental analysis (FA) - a term used in the financial world to determine the intrinsic value of an asset or business. In traditional financial markets, FA is often used to analyze potential investment opportunities, along with other market analysis approaches such as technical analysis (TA) and sentiment analysis.
Analyze project whitepapers
A good habit for traders and investors is to go directly to the source of information and read the project's "white paper," a conceptual document, website, and other marketing materials. A white paper is an authoritative document usually written by the project team to state the problem and explain how their product, technology, or token can solve it. Anyone can use these sources to carefully evaluate their mission, vision, and plan. What problem are they trying to overcome? Does the real problem affect a large number of people? Is the proposed solution feasible?
If the vision sounds too complicated and there is no clear path to achieving it, this may be a sign of an overly ambitious project that is unlikely to deliver on its promises.
Study the numbers
The numbers surrounding a project and its digital asset can provide investors with a lot of information. For example, the number of social media networks and community channels a project has can be a good indicator of its popularity. However, beware of bots and fake accounts as they can create an inaccurate impression of how others perceive the project and its products. How engaged is the community? Is the communication active and natural? There are tools available to verify if the number of followers on social media accounts is accurate.
Asset price, market capitalization, circulating supply, total supply, daily active users, token holder distribution, and 24-hour trading volume - all of these can provide valuable information. By studying these numbers, you can assess the activity of other investors and users over time. You can also combine them with elements such as roadmap stages and marketing plans to gain a broader perspective.
Many projects publish detailed information about their tokenomics when launching. These can describe how the project's tokens will be distributed and what incentives exist to encourage community activity. Tokenomics can also contain interesting details such as founder and team investments.
Most blockchains record all transactions publicly, and anyone can view them using blockchain explorers. Blockchain data aggregators such as Glassnode and IntoTheBlock can also help provide additional information on asset metrics.
Find authoritative sources
Many cryptocurrency media sources compete for attention. When relying on such channels for comments and context, studying these channels can be as useful as researching the project itself. Where do they draw their experience from? How authoritative are they? Is the information objective and unbiased?
Hire a professional financial consultant
Some people hire professionals to conduct market analysis and project research. While this outsourcing method can help save time and effort, you should consider that you are risking a comprehensive check being carried out by a third party.
Conclusion
The cryptocurrency market can be extremely volatile, so it is important to remember that no amount of research can guarantee successful investments. To reduce risk, investors can arm themselves with knowledge about the project they want to invest in. There is much to learn in the cryptocurrency market; the more investors improve their knowledge, the better it will help them make informed decisions.