Investing like a pro: how to do your own research in crypto

The cryptocurrency landscape is riddled with volatility and potential fraudsters. Learn how to master the art of crypto research and stay informed.

In the cryptocurrency sector, the advice “Do your own research” (DYOR) is often heard. This is a reflection of the market’s volatility and the potential risks involved. There are people ready to exploit those who are not well-prepared.

Understanding more than just the basics of the crypto world is vital to navigating its challenges and opportunities.

So, how can you gain a comprehensive understanding of the sector? How can one make informed investment decisions?

This guide aims to assist newcomers in honing their skills in crypto asset research.

What to look for when researching cryptocurrency

Although conducting research might seem intimidating, it doesn’t need to be. As a prospective investor, you can focus your research on numerous facets of a project, yielding a reasonably comprehensive understanding of its potential.

The website and whitepaper

Your research should always kick off by acquainting yourself with the fundamental details of a coin or crypto project. And where better to find this information than on the project’s website and within its whitepaper?

In crypto, a whitepaper is a comprehensive document outlining the project’s intricacies and specifications. It encapsulates crucial project-related information, explaining how it functions and the particular issue it aims to resolve.

It’s worth noting, though, that some whitepapers might delve into technicalities beyond the grasp of the average investor. Nonetheless, it’s advisable to give them a read or even have someone with a more technical inclination provide you with a concise summary.

When assessing the website, look for signs of unprofessionalism, like grammatical or spelling errors. Consider the extent of pertinent details provided. Does the site furnish contact information? Does it feature a privacy policy or terms of use?

Furthermore, inspect the website for any indications of broken elements or links to external pages; these could signify a phishing attempt.

However, remember that while an elaborate website doesn’t automatically denote a legitimate project, it’s likely that legitimate projects will boast well-designed websites.

The team and strategic partners

Once you’ve delved into the website and whitepaper, the natural progression leads you to uncover the faces and minds propelling the project forward. 

Uncovering insights about the team, developers, and any influential partners is a pivotal undertaking in gauging the potential success of a project. 

When sizing up the credibility of a project’s team, take heed of the following considerations:

• Scrutinize whether the team has forged strategic partnerships that could uplift its product or introduce it to new horizons. And don’t just settle for eye-catching logos on a webpage; seek press releases or other information substantiating these alliances.
• Investigate if any team member boasts experience from previous crypto ventures, and if so, evaluate their track record in those endeavors.
• Verify whether team members have revealed their real identities and look into their reputation even off the internet.
• Ascertain the frequency and responsiveness of the team’s interactions with the community. A robust rapport and attentiveness to user inquiries speak volumes about a project.
• Venture into mainstream and crypto-centric news outlets and social media platforms to establish whether any team member, advisor, or partner has made waves, positive or negative.
• Probe into the team’s online presence – does it hold weight? Are their profiles on platforms like X (Twitter) and LinkedIn? And crucially, do they actively engage on these channels?

Understanding the human element driving a project and evaluating its connections is pivotal to your research journey.

Tokenomics

Next, look into a project’s tokenomics, which essentially encompasses its economic architecture and attributes. Think of it as the blueprint that defines a token’s supply, distribution, utilization, and motivations guiding its actions.

Tokenomics plays a big role in determining a project’s fate – it can spell success or doom – making it a crucial aspect to research before investing.

There are four key factors that warrant your attention when looking at a project’s tokenomics:

• Supply: This is the total number of tokens that will get into circulation. Some tokens have a capped supply, while others are unlimited. Additionally, tokens may be inflationary, meaning their number increases over time, or deflationary, meaning the supply is decreased over time. Remember, each model has its own advantages and disadvantages that you should consider when researching.
• Distribution: This pertains to the allocation of tokens to investors, partners, and the project’s team. An imbalance, where internal stakeholders receive a disproportionately larger share than the general public, can create vulnerability to price manipulation or even a sudden market crash.
• Utility: This is all about a token’s functionality within its ecosystem. A robust token shouldn’t merely exist as a tool for speculation; it should hold real-world utility and the potential for adoption beyond its network. Consider a token that facilitates payment for services within a decentralized application (dApp) – it holds more practical value than one confined solely to speculative trading. Also, a token with the capacity for widespread adoption outside its ecosystem (think real-world usage for goods and services) holds more inherent value than a token tethered to a niche enclave.

As you research tokenomics, remember that understanding these factors is akin to wielding a compass in the world of cryptocurrencies. It’s not just about what a token is but what it can become within its ecosystem and beyond.

The value proposition

The value proposition is the essential offering of a project, the bedrock of what it brings. It sets the project apart and delivers tangible benefits to its users. 

A strong value proposition significantly boosts the likelihood of a project’s success compared to one lacking in this aspect.

When assessing a project’s value proposition, you should consider the following:

• What specific problem does the project tackle?
• Does the magnitude of the problem necessitate a solution?
• How effective is the project’s solution?
• Is the project’s solution viable and realistic?
• Can the project’s solution be maintained over time?

Projects that come across as trivial or lack a distinct purpose are more prone to falter. It is advisable to avoid such ventures as they’re unlikely to bring meaningful value to users. 

Even if a token’s price surges temporarily, the absence of intrinsic value poses a considerable risk.

Your research should lead you to projects underpinned by a good value proposition because such initiatives have a better chance of sustained success in the long run.

Technology and scalability

Two things stand out when sizing up a project’s potential for success: technology and scalability. A well-designed project with the power to seamlessly expand and accommodate a growing user base holds a higher promise of success.

A project’s underlying infrastructure will determine its speed, security, and efficiency. Additionally, its scale-up ability determines how well it can handle increased usage and traffic.

If the technology is poor, it puts a project and its token at a disadvantage, especially compared to other platforms offering similar services. 

There are several ways to research a crypto asset’s underlying technology:

• Read the whitepaper: We’ve said this before, but it bears repeating; the technical aspects of a crypto project are mostly found in its whitepaper. A document that is light on technical details should set alarm bells ringing.
• Check the project’s GitHub: You should find a project’s source code on its GitHub repository. If you can, check to see how well it’s written and how active the development is. 
• Check online forums: This is especially important if you are unfamiliar with some of the technical information you may have found on a project’s whitepaper or GitHub repository. Online forums such as Reddit or Bitcointalk are often treasure troves of information about hundreds of crypto projects, both new and established. There, you can get multiple satisfactory answers to any question about a project’s code or underlying technology.
• Check blockchain explorers: If you are interested in viewing activity on a project, tools like Etherscan or Blockchair can be useful. If the project is built on Ethereum, Etherscan allows you to examine its on-chain data, including transactions, smart contracts, and block wallets.
• Consult with experts: Again, if the technical details of a project are beyond your understanding, the best recourse is to find an expert that will break it down for you in a manner you can digest. As mentioned, you can find them on online forums or even by attending crypto events in your area.

Ecosystem and network dynamics

When you shift your focus to the project’s ecosystem, you’ll gauge factors like user count, transaction volume, developer involvement, and overall activity.

Visualize the project’s ecosystem as a dynamic community – encompassing users, developers, enterprises, and stakeholders. The vigor and scale of this ecosystem often echo the project’s potential.

To be adequately conversant with the dynamics of a network, it is advisable to obtain reliable usage and transaction data. There are various on-chain research platforms, such as Messari, Nansen, and Chainalysis, where you can find this information.

If you are researching decentralized finance (defi) protocols, you should also consider the total value locked (TVL) of the project. TVL denotes the overall value of crypto deposited in a defi platform. It has emerged as a critical metric for gauging the success of defi projects and can help determine the suitability of a crypto project for investment.

Essentially, the higher a protocol’s TVL, the more funds have been locked through staking or other defi-related activity. Websites that can help you keep track of TVL include DefiLlama, Token Terminal, and DeBank. 

Community involvement

The success of many crypto projects is often hinged on the support and involvement of its community. It’s, therefore, not uncommon to find them actively building these communities and even giving them catchy names to cultivate a sense of unity and exclusivity.

A vibrant community is usually a good sign of a coin’s viability. Additionally, joining such communities on platforms like Reddit, Telegram, or Discord can enrich your research.

Gauging the general mood of a community can also give you a fair idea of the prevailing sentiment toward a specific cryptocurrency or the market in general. Crypto is speculative in nature, so people’s feeling toward an asset matters a lot.

Don’t forget to watch influential figures within a particular community or the broader crypto ecosystem. Some may significantly influence crypto prices and can either make them rise or drop with a single tweet or video post. 

However, be wary of those paid to shill a coin. Some projects pay celebrities and social media influencers with huge followings to promote coins with no solid tech or intrinsic value. So, take your time to observe the activities and verify the pronouncements of these accounts before you can fully trust them.

Competitors

Your research isn’t done until you look at what a project’s competitors are up to. At the time of writing, there were more than 9,680 cryptocurrencies listed on CoinGecko, many mirroring each other’s functionalities. 

Projects need a unique proposition or the advantage of being the first to market to get ahead in such a crowded field.

As an investor, your research should center on a project’s history and track record, assessing its products, innovations, and utility and whether some other platform is doing it better. 

Furthermore, keep an eye on projects constantly improving their technology and infrastructure to offer better services and those with the fewest glitches, downtimes, or exploitation incidents. Often, they will be the most popular and potentially give you the best chances of a return on your investment.

Future profitability: stock-to-flow ratio

Some cryptocurrencies, like Bitcoin, lend themselves to predictive models that can reasonably forecast their prices in the future. One such model is the stock-to-flow ratio (S2F), a traditional investment model used to gauge the scarcity of an asset and its potential future value.

The model hinges on the concept of “unforgeable costliness,” a term coined by Nick Szabo in his book, “The Origins of Money.” It refers to the challenge of producing precious resources akin to the rarity of gold.

This unforgeable costliness has manifested in specific cryptocurrencies. Take Bitcoin as an example. Producing BTC demands substantial energy and computational power, and its total supply is limited. This rarity imbues BTC with significant value, particularly as a store of wealth.

How to calculate stock-to-flow

The mechanics of calculating S2F are pretty straightforward:

Stock-to-flow ratio = stock ÷ flow.

Here, “stock” denotes a digital asset’s existing availability or circulating supply. “Flow,” on the other hand, signifies the projected new coins to be mined over a year.

This formula seamlessly fits cryptocurrencies with capped supplies and methodical issuance schedules, such as Bitcoin and Litecoin (LTC). Let’s illustrate the process using BTC.

By August 2023, each mined Bitcoin block rewarded 6.25 BTC every 10 minutes, translating to an hourly output of 37.5 BTC and a daily yield of 900 BTC. Extrapolating to a year, we calculate Bitcoin’s annual flow:

900 x 365 = 328,500.

When writing, Blockchain.com tallied 19,453,175 Bitcoins in circulation—a snapshot of the BTC stock. Calculating the S2F ratio involves dividing stock by flow:

19,453,175 ÷ 328,500 ≃ 59.

Interpreting stock-to-flow

To effectively utilize the stock-to-flow model in cryptocurrency research, you need to understand its mechanics and influencing factors. Once understood, it can aid in pinpointing cryptocurrencies with high stock-to-flow ratios for potential investment.

A low stock-to-flow ratio indicates there are still a lot of coins to be mined relative to what’s currently circulating in the market. It means that the coin is more likely to be affected by inflation in the future, causing its price to drop. 

On the other hand, when a cryptocurrency’s stock-to-flow ratio increases, so does its value. This relationship can be used to make investment decisions. A high stock-to-flow ratio, such as Bitcoin’s 59, indicates extreme relative scarcity, meaning that prices will most likely rise in the future.

While this strategy can potentially lead to amplified returns over time as scarcity and value intertwine, it’s essential to acknowledge that various factors impact a cryptocurrency’s stock-to-flow ratio; therefore, the expected price rise may fail to materialize.

Stock-to-flow limitations

Stock-to-flow is a useful model for measuring scarcity, but it has limitations in its approach.

S2F assumes that scarcity, as measured, drives value. However, critics argue this fails if a coin lacks other valuable traits beyond scarcity. For instance, gold’s scarcity, steady flow, and global acceptance make it a stable store of value compared to cryptocurrencies, which often lose value.

Furthermore, while S2F’s methodology centers on predicting an asset’s future price, it disregards critical elements such as demand dynamics and the impact of volatility. These factors can substantially influence a coin’s valuation, thus contributing to a more comprehensive understanding of its future trajectory. 

Cryptocurrencies are also notorious for significant price swings often spurred by multifaceted catalysts, including government regulatory interventions aimed at controlling or halting crypto trade.

Additionally, the actions of crypto “whales” — entities holding large amounts of a cryptocurrency’s supply — have the potential to trigger cascading effects across crypto exchanges, thereby precipitating market tumult.

External factors, like unexpected economic crises, can also challenge the S2F model. This is a limitation faced by any model predicting asset prices from historical data because Black Swan events, which are inherently surprising, can’t be foreseen through such data.

Where to get your information

Now that we know what to look for when researching crypto, the next question is, where can we find this information? 

Social media

Given its time-sensitive nature, social media is often the best place to get crypto-related information.

X

Formerly known as Twitter, X is often first and fast with crypto-related news and information. Whether it’s listing new coins, unveiling a new project, or updating an existing blockchain, X is where most of the news breaks.

Moreover, the platform is filled with knowledgeable accounts offering helpful information on all aspects of the digital asset space. X is also where communities that coalesce around particular coins are most active.

You can quickly contact a project you are researching if it has an account on X, or you can search for the latest rumors about a particular coin.

Nevertheless, the social network is also full of people shilling worthless coins, spreading misinformation, or sharing unsolicited opinions. So, you must carefully curate your timeline to eliminate unnecessary fluff and weed out unhelpful bots.

Reddit

Reddit also hosts a vast crypto community. Like X, it allows you to talk to people, ask questions, and get real-time answers. 

The platform’s unique voting system makes it easier to get the best crypto-related content as communities upvote the best information, making it more prominent, while downvoting posts shilling or hawking coins, ensuring they are less visible.

It’s also an excellent platform to evaluate how active a project is and how big and involved its community is. 

You can check how often team members interact with users in subreddits or if they hold ask-me-anything (AMA) sessions to respond to community concerns and keep users updated on the latest happenings.

YouTube

People love videos, and there’s something oddly satisfying about watching someone explain a concept or make a prediction rather than reading it on your own. 

It is why YouTube is so popular. The platform contains a treasure trove of crypto-related channels catering to every level of expertise. 

On some channels, beginners can learn the essential elements of cryptocurrency, while on others, experts can brush up on more complex aspects of the technology.

Still, some videos are full of clickbait and sensationalism, while others are affiliate marketers masquerading as news and analysis channels. You’ll therefore need to exercise great care regarding the content you’ll consume on YouTube as part of your research.

Discord / Telegram

Discord and Telegram also offer access to a large and diverse community of crypto enthusiasts, experts, developers, and investors.

They are better for a more focused approach, as they enable specific topics, projects, communities, or events to be siloed in dedicated channels and chats.

These platforms also allow for real-time communication with voice, video, or text, meaning you can have more direct access to experts or members of a project team while doing your research. 

Crypto news outlets

The growth of the digital asset industry has been mirrored by the emergence of crypto-specific news outlets providing timely updates on the latest developments in the crypto space.

Most are good sources of information and can help you better understand market dynamics, technical aspects, and the social and regulatory implications of cryptocurrencies. 

Some even have professional analysts and advisors who can offer tips on investing, trading, and using cryptocurrencies safely and effectively. 

Nonetheless, with the advent of generative AI, some websites have popped up, churning sensationalist content using tools like ChatGPT, DALL-E, or Bard. 

By August 2023, NewsGuard, a misinformation watchdog, listed 408 websites it suspected of publishing news stories generated entirely by AI. Most of the stories were riddled with inaccuracies, and anyone using them for research would be liable to be misled. 

Therefore, you should source your research information from more established outlets. But don’t rely on just one platform; crosscheck that what is being reported is the same across several websites. 

Their reports may link to verified social media posts, official announcements, and press releases or be the product of exhaustive research and analysis. Find out where these outlets source their information and if they are reliable.

Final thoughts

FAQs