On-chain analysis is a powerful tool for traders and investors looking to gain an edge in the cryptocurrency markets. It involves examining blockchain transaction activity to understand how investors react to market forces/events and determine emerging trends/investor sentiment. With on-chain analysis, investors have access to unparalleled levels of data that can be used to make informed decisions about their investments.
On-chain analysis is useful for traders operating in both the short-term and the long-term markets because it provides them with access to data that is updated in real-time and enables them to make well-informed choices about their investments. Traders are able to obtain a better knowledge of the present direction of the market and spot prospective investment opportunities if they have a solid grasp of the underlying mechanisms that govern how investors respond to market occurrences.
History
The coin days destroyed (CDD) measure was the first on-chain metric to be introduced. ByteCoin, a member of Bitcoin Talk, devised it in 2011 as a method for determining the state of the market and the level of involvement in it by examining the average age of bitcoins that were traded on any given day.
One of the most talented on-chain analysts, Willy Woo, is responsible for the creation of the network value to transactions ratio (NVT) in the year 2017. That was the year that saw the commencement of a number of rapid improvements in on-chain research. These developments included the establishment of Glassnode, Coin Metrics, and a number of other companies. The following year saw the establishment of Messari, Dune Analytics, and several other analytics platforms.
Following the quick changes that took place in 2018, there has been a significant rise in the utilization of on-chain analysis. As a result of this growth, we now have access to a greater number of new data suppliers and analysts, in addition to an explosion in the number of metrics available, with over 100 available on Glassnode alone.
How on-chain analysis is conducted
A crypto on-chain analysis is conducted by following these steps:
1. Gather data from public networks such as Bitcoin, Ethereum, Ripple, and Litecoin.
2. Examine the blockchain transaction activity to identify patterns and correlations between investors’ actions and market forces/events.
3. Analyze the collected data to understand how investors react to different market occurrences and spot potential investment opportunities.
4. Utilize whale-watching tactics (tracking large or prominent players) in order to gain an insight into what other investors may be doing in certain situations (such as when they start selling).
5. Use on-chain analytics platforms like Glassnode or Nansen to gain a deeper understanding of trends emerging from the collected on-chain data, so that traders can make better decisions based on it.
Benefits of crypto on-chain analysis:
1. Gain an in-depth understanding of the cryptocurrency markets.
2. Uncover emerging trends and investor sentiment.
3. Make informed decisions about investments based on data-driven insights.
4. Identify possible arbitrage opportunities for quick profits.
5. Monitor transactions to detect suspicious activity or potential scams early on.
6. Assess the current liquidity of certain cryptocurrencies by understanding their exchange flow and trading volume.
Drawbacks
Limitations of on-chain analysis:
1. It requires a significant amount of data to make informed decisions, which can be difficult to obtain for certain cryptocurrencies that don’t have enough trading activity or liquidity.
2. On-chain analysis is only as good as the data that it’s based on. If the data is inaccurate or outdated, then any decisions that are made based on it will be flawed as well.
3. On-chain analysis doesn’t take into account fundamental factors such as news events and market sentiment, which can have a major impact on the price of cryptocurrencies.
On-chain analysis metrics
Metrics used in on-chain analysis are:
1. Network Growth Rate: This metric measures the growth of the blockchain network over a given period of time, providing insight into its popularity and adoption rate among investors. It can also be used to compare the growth of different cryptocurrencies.
2. Transaction Volume: This metric measures the amount of transaction activity taking place on a given blockchain network over a specified period of time. It can provide insight into user engagement and investor sentiment for a particular cryptocurrency.
3. Exchange Flow: Measuring exchange flow helps investors understand how much of a cryptocurrency is being transferred between exchanges, providing valuable insights into the current liquidity of a given token.
4. Trading Volume: This metric helps investors understand how much trading activity is taking place for a particular cryptocurrency and whether or not it’s gaining traction with investors. It can also be used to assess investor sentiment for the asset.
5. Hash rate: The amount of processing power that miners provide to the network in order to keep it safe is measured by the hash rate. In general, the level of security increases proportionally with the hash rate.
Top on-chain analytics platforms
1. Glassnode
Glassnode is a powerful on-chain analytics platform that provides real-time insights into the cryptocurrency market. With its suite of tools, users can gain an in-depth understanding of the digital asset markets and uncover emerging trends and on-chain analytics.
2. Nansen
Nansen is an on-chain analytics platform that is powered by artificial intelligence and offers profound insights into digital asset markets. Nansen offers traders, hedge funds, and other financial organizations with strong insights by merging innovative machine-learning algorithms with market data.
3. CryptoQuant
CryptoQuant is a firm established in South Korea that provides a community-based analytics platform with the goal of assisting investors and stakeholders in the cryptocurrency industry in making choices that are driven by facts.
4. Santiment
Santiment is a cryptocurrency analytics software that tracks 900+ coins and gathers data on their social and development activity on the blockchain. Santiment’s goal is to standardize cryptocurrency market statistics, best practices, and project disclosure.
5. Dune Analytics
Dune Analytics is a data platform that crypto analysts and investors utilize in order to do research on individual projects such as NFTs, DeFi platforms, or blockchain ecosystems. Dune makes it possible for anyone to query the data and create visualizations.
How on-chain and off-chain analysis are different from each other
The distinction between on-chain analysis and off-chain analysis lies in the fact that on-chain analysis focuses on the data that is recorded within the blockchain itself, such as transaction activity, exchange flows, and trading volume, whereas off-chain analysis focuses on external data that is not recorded directly in the blockchain, such as news events, market sentiment, and trends in the more extensive cryptocurrency markets.
Conclusion
In conclusion, on-chain analysis can be an invaluable tool for crypto traders and investors looking to gain a competitive advantage in the markets. By leveraging blockchain transaction data, you’ll have access to unparalleled levels of information that will help you make informed decisions about your investments. While it is not without its limitations, understanding what crypto on-chain analysis means and how it works can give you a much-needed edge over other players in the market. With this newfound knowledge, you should now feel better equipped to maximize your profits with any future trades!
