On-chain analysis refers to analyzing the data recorded on the blockchain itself. There are several tools out there that allow you to analyze the data stored on the blockchain. These include BlockCAT, Chainalysis, and Coinmetrics.
Why Is On-Chain Analysis Important?
Data from on-chain analysis allows us to see exactly who owns what (number/value of coins) at any given time. This information is stored in blocks, or records of transactions which are then linked together into chains.
Unlike technical analysis, on-chain analysis is a fundamentally driven approach to financial analysis. It’s focused entirely on a single crypto asset by looking at the crypto’s fundamentals, utility, transaction activity, and historical trends that can forecast the crypto market direction.
With cryptocurrencies, trading data and investment activity can be extracted from the blockchain network and analyzed to derive actionable crypto markets in a process called on-chain analysis. By accessing enormous amounts of financial data dating from years back, data analysts and scientists can analyze the data to generate market sentiments that can aid in trading decisions. Besides, the extracted financial data can be used to create machine learning models that can accurately predict future market directions.
In addition to fundamental and technical analysis, on-chain analysis is increasingly becoming crucial for any avid crypto trader.
On-chain Data Platforms and Analytics Tools
On-chain data platforms and analytics tools enable anyone to obtain on-chain data sets and analyze them to generate actionable market signals. While anyone can access the public ledger of a particular cryptocurrency and look into certain metrics such as transaction records, it’s pretty challenging to analyze this data. Not everyone can gather, structure, and analyze the captured on-chain data. For instance, Blockchain explorers such as EtherScan for the Ethereum network allow you only to view gas fees and wallet addresses, track tokens, view Txns, and look up smart contracts. It neither combines data nor provides analysis tools to make sense of the enormous data sets.
Several third-party on-chain data platforms and analytics tools have been launched to solve Blockchain explorers’ shortcomings. These platforms feature insightful charts and dashboards to enable users to visualize different on-chain data and deduce critical information. Below are some popular on-chain data platforms.
- Glassnode-Based in Switzerland, Glassnode is an intuitive platform that offers on-chain metrics, with an extensive set of data points even for the free plan. The platform is user-friendly, with an impressive user interface. The paid version of the platform offers advanced metrics, in-depth reports about on-chain insights regularly, and dynamic time-series data.
- Whaleportal – Whaleportal is a cryptocurrency trading dashboard that provides traders with derivative exchange data like funding rates and open interest. Cryptocurrency traders analyze these metrics to predict price direction and volatility.
- IntoTheBlock– This platform offers a wide range of analytical tools which can be used for on-chain analysis, sentiment analysis, and order book data for supported cryptocurrencies.
- Coin Metrics– Established in 2017, Coin Metrics offers investors in-depth on-chain metric analysis for all the major cryptocurrencies. You can access network data on this platform, including transaction backgrounds, market data covering over 20 global exchanges, indexes, and third-party data, including the Twitter sentiment feed.
- CryptoQuant– Based in Seoul, South Korea, CryptoQuant is an on-chain data provider focusing on Ethereum, Bitcoin, and other stablecoins. Apart from on-chain data, this platform offers exchange data, miner data, and network data that can still be analyzed to establish market direction
Important On-Chain Analysis Metrics
Thousands of metrics can be obtained from the on-chain analysis to enable you to enhance the outcome of trading decisions. Below are some on-chain analysis metrics worth looking out for:
Metrics to Measure Network Strength
Several on-chain analysis metrics can be used to give crypto traders and investors a bird’s eye view of the cryptocurrency’s network. With these metrics, you can know how secure a blockchain network is, monetary policies existing on the particular network, network growth, and how much it’s being used, among other metrics.
Examples of on-chain metrics that can be used to establish a crypto network’s strength include:
- Transaction volume
- Active addresses
- Daily issuance
- Supply distribution
- Miner revenue
- Hash rate
Metrics to Monitor Buying and Selling
The above-listed metrics tend to describe the network’s long-term health and are best when formulating a long-term trading decision. For short to mid-term trading decisions, on-chain analysis metrics to monitor buying and selling are best used. These metrics can indicate whether traders of particular crypto are making a profit or loss and how many coins are held by miners, exchanges, and individuals. For instance, if long-term traders move a large number of coins onto exchanges after a significant market rise, these metrics will tell you that a significant sell is looming. Some of the metrics to monitor buying and selling and provide short to mid-term market action include:
- Realized profits and losses
- Cointime destroyed
- Supply in profits and loss
- Therm capitalization
- Realized capitalization
- HODL waves
Metrics to Evaluate a Coin’s Price
As a cryptocurrency trader, it’s important to always know the best time to buy or sell digital assets. And to do this, you have to understand the market trends in real-time. These on-chain analysis metrics can enable you to understand the short-term market trends to know exactly when to sell or buy a particular coin.
- Market value to realized value(MVRV)
- Network value to transaction(NVT)
- Stock-to-flow ratio
- Stablecoin supply ratio(SSR)
Blockchain technology provides an immutable record of transactions. It also allows for transparency and traceability of data. Luckily, among the blockchain data accessible by everyone is on-chain analysis. Though frequently ignored, only the smart traders and investors understand how critical the on-chain info is when formulating trading strategies for cryptocurrencies. Make sure you look at all angles before boldly investing in any crypto!
Is trading cryptocurrency profitable?
Yes! If you want to invest in cryptocurrency, you must first decide which. I suggest choosing Bitcoin, Ethereum, Ripple, Litecoin, Dash, Monero, NEM, Neo, EOS, ZCash, Stellar Lumens, Ontology, Qtum, Waves, Siacoin, and Icon. Once you’ve chosen a coin/token, then start buying them. When prices go up, sell them at a higher price. This is how you make money investing in cryptocurrencies.
Can on-chain crypto analysis make me a Pro-trader?
Yes, it can. You need to study the trends and data provided by the blockchain. And after reading all the information available, you should be able to predict future trends.
What do I need to trade crypto?
To start trading cryptocurrency, you’ll want knowledge about blockchain technology and what cryptocurrencies are. There are several different types of cryptocurrency, such as Bitcoin, Litecoin, Ethereum, Ripple, and Monero, and each has advantages and disadvantages for traders. The best exchange rates come from exchanges that offer fiat currency transactions and crypto-to-crypto trades.