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An Underrated Blockchain Secret: The Power of On-Chain Analysis

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To HODL or to trade? That is the question. Some assets are meant to be held for the long term and watch them age like fine wine. Whereas some other assets are meant to be sold fast for profits, like hot cakes. The same goes for trading and cryptocurrency. Most traders will turn to fundamental analysis or technical analysis to plan out their trading strategies. However, there’s an immensely underutilised yet powerful analysis method that is not used often enough among traders: on-chain analysis.
In this article, you’ll understand how to harness the power of on-chain data to make more informed decisions and potentially enhance your trading prowess.

What is On-Chain Analysis?

At its core, on-chain analysis is the meticulous examination of transaction data recorded on a blockchain. This data, which is publicly accessible through platforms like Etherscan and BscScan, forms the lifeblood of the cryptocurrency ecosystem.

Just as traditional financial analysts pore over balance sheets and income statements, on-chain analysts scrutinise the blockchain’s ledger to look for hidden insights. The transparency and immutability of the blockchain make this data a treasure trove for cryptocurrency traders and investors. To illustrate, even public figures like Vitalik Buterin cannot hide their crypto activities, thanks to transparent wallet addresses that curious on-chain analysts monitor closely.

Who Should Use On-Chain Analysis?

The beauty of on-chain analysis is its versatility, catering to various players in the crypto arena:

Crypto Traders: For traders, on-chain analysis provides a comprehensive overview of network dynamics and invaluable clues for anticipating price movements.

Crypto Investors and HODL-ers: On-chain metrics can help investors monitor and figure out the potential, stability, and growth of their tokens, coins, and funds.

Crypto Enthusiasts: These enthusiasts explore blockchain data’s intricacies, uncovering hidden trends and anomalies that provide deeper insights into the crypto world.

Key Metrics for On-Chain Analysis

To wield the power of on-chain analysis effectively, it’s crucial to understand the key metrics at your disposal:

Active Addresses: This metric reflects user engagement, with a higher number of active addresses suggesting increased adoption and demand for a cryptocurrency. In essence, for active addresses, it’s the more, the merrier, the better.

Transactional Volume: Most traders consider this to be one of the key predictors of a project’s trajectory. Transactional volume represents the dollar value of cryptocurrency exchanged between addresses. High-volume coins tend to exhibit lower volatility.

Supply Distribution: Understanding the distribution of coins across various-sized wallets is crucial for assessing market stability and potential manipulation. A network with a large number of whales isn’t the best image of a healthy network as they might collectively manipulate volatility by HODL-ing or flooding the market with their funds.

Total Value Locked (TVL): Primarily used in DeFi, this phrase is often used to depict the total value or worth of cryptocurrency assets stored or “locked” within a DeFi platform or a smart contract. TVL offers insights into a protocol’s popularity, liquidity, and trust among investors.

How Traders Employ On-Chain Analysis

On-chain metrics are indispensable for traders seeking to evaluate short to mid-term market actions. By scrutinising these metrics, traders can gauge market sentiment and anticipate potential price swings. Key indicators for traders include:

Realised Profits and Losses: This metric measures the value of coins being sold at a profit or loss, providing insights into investor sentiment and potential market movements.

Supply in Profits and Losses: This data showcases the number of coins currently in profit or loss relative to their last purchase price, helping traders understand market dynamics. In general, a healthy market will have more coins in profit than in loss.

Realised Capitalisation: Realised capitalisation is calculated by adding up the most recent price of every token, and then comparing it with the market cap. If the realised capitalisation is higher than the market cap, then the market is in profit.

Digging Deeper with Blockchain Explorers

Blockchain explorers offer more than just confirmation checks; they unlock the ability to dig deep into wallet activities and help you to make decisions.

Large Coin Analysis

Analysing on-chain data for major cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and Dogecoin involves key metrics accessible through in tools like BitInfoCharts. Bitcoin’s even distribution among the top 100 wallets showcases decentralisation, reducing the risk of a single wallet impacting the market significantly. Tracking wallet activity by examining when each wallet was last transacted provides insights into address activity or potential dormancy due to lost private keys.

You would also want to pay attention to multi-sig wallets, which require multiple signatures to sign off any transaction. These often belong to institutional investors, and they usually have a major impact on the market.
Additionally, monitoring coin movements between wallets, especially large transfers to or from exchanges, offers clues about market sentiment. If large amounts of BTC are moving to exchange wallets, that means people are selling. If the reverse is happening, that means people are HODL-ing on to their BTCs.

Mid to Small Coins Analysis

For smaller altcoins residing on smart contract blockchains, thorough on-chain analysis requires exploring various blockchain explorers as default ones may lack critical information.
Many popular altcoins reside on Ethereum, making platforms like invaluable. They provide comprehensive insights into tokens and their movements. Analysing token distribution among smart contracts unveils contract purposes. If nearly half of the project’s tokens are held in only three smart contracts, you can try to find out what the smart contracts are for. It should give you clues about the coin’s purpose and potential.

Identifying tokens leaving wallets for exchanges signals selling activity, even by founders or early investors. Such data is essential for informed decisions in the volatile cryptocurrency trading landscape. For example, if you see Ethereum’s founder, Vitalik Buterin suddenly sending all his coins to an exchange. It would be wise to follow suit. Action speaks louder than words after all.

On-Chain Analysis for Proof-of-Stake (POS)

POS cryptocurrencies introduce unique complexities due to staking contracts. Stakers’ behaviours can significantly impact supply distribution and market stability. To navigate this properly, traders monitor the percentage of tokens being staked. This metric offers insights into HODL-ing intentions and potential selling pressure. Platforms like Staking Rewards provide valuable data on staking percentages. Additionally, POS networks with lengthy unstaking periods may offer traders more opportunities to time the market effectively. This can help traders figure out the market volatility and plan strategies around it.

On-Chain Analysis for Proof-of-Work (POW)

POW cryptocurrencies which are reliant on mining, offer a different set of challenges and opportunities for traders. Analysing miners’ behaviour, node counts, and hash rates can provide valuable insights. Growing numbers of validators or miners signify long-term belief in a project’s potential. Ethereum 2.0, with its substantial validator requirements, exemplifies this trend. Additionally, tracking the Bitcoin hash rate and Lightning Network nodes can offer glimpses into the future of these networks. If there are a large number of validator nodes joining every month, there’s a high chance that people believe in the project’s long-term potential.

The Future of On-Chain Analysis

On-chain analysis is still in its infancy, with new metrics emerging as the crypto landscape evolves. It’s important to remember that on-chain analysis should complement other analytical tools, not replace them. A holistic approach that combines fundamental, technical, and on-chain analysis provides traders and investors with a well-rounded understanding of the market.

Bring your cryptocurrency trading and speculation up to the level. By going a step further than others to include on-chain analysis in your trading strategies, you get to gain an edge on the market, compared to others. At the end of the day, a tool is only as good as the person wielding it. The same goes with knowledge, on-chain analysis can help traders and speculators gain the upper hand on their crypto journey. In the end, it’s just a method to help build strategies, it’s still up to the user to utilise it properly.

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