An in-depth look at on-chain data: How can it be an analytical tool for trading and investment strategies?

What is On-chain Analysis and 3 Tools to Visualize On-Chain Data?

Original article by CoinGecko-Josiah Makori

BlockTurbo

Unlike other asset classes, encrypted transactions from public blockchains are freely accessible, making them suitable for data science and machine learning. You can easily extract and analyze blockchain data, also known as on-chain analysis. With this rich, open financial data, you can gain valuable insights into market trends, sentiment, and other investor behavior.

Constantly observing and tracking the market is an indispensable strategy for potential profit. While fundamental and technical analysis can provide insight into various market trends, extracting data from on-chain sources can provide a bird 's-eye view of the blockchain. However, this does not mean that they are mutually exclusive. You can use all three together when analyzing the potential of cryptocurrencies.

In this article, we'll delve into what on-chain analysis is and how you can use it to enrich your trading and investment strategies.

What does it mean on the chain? On and off the chain

Before defining on-chain analysis, let's understand what on-chain analysis is and how it compares to off-chain analysis. As the name suggests, on-chain refers to transactions that are verified and recorded on the blockchain. In the case of proof of Work (PoW), verification and recording is done by the miner, while in the case of Proof of Equity (PoS), verification and recording is done by the verifier. Anyone anywhere can access on-chain transactions recorded on a public blockchain.

On the other hand, down the chain is the opposite of up the chain. It refers to transactions that are verified and recorded outside of the blockchain via Layer 2, and typically have lower costs and faster transaction speeds.

Technical vs. on-chain vs. fundamental analysis

Fundamental analysis

Fundamental analysis seeks to understand an asset through factors such as its market value, trading volume, utility, number of owners and the authenticity of the team behind it. This analysis is necessary to determine whether assets are overvalued or undervalued. Here's a simple example of fundamental analysis of Bitcoin (BTC) :

The maximum supply of BTCS is 21 million and 19.3 million BTCS are currently in circulation. That means there are only 1.7 million bitcoins left to circulate, resulting in a scarcity of BTCS. According to the laws of supply and demand, the scarcer an asset is, the more value it gets. This information is part of the fundamental analysis you can use to make informed investment decisions.

Technical analysis

Technical analysis uses data on past performance to analyze cryptocurrencies in order to predict likely market performance. Technical and fundamental analysis of various factors affecting the price. Fundamental analysis draws price movements from economic activity, information releases and geopolitical events; In contrast, technical analysis focuses on past activity, price movements, and trading activity.

Let's use BTC's price action from November 2020 to July 2021 to illustrate how technical analysis works. The figure above illustrates the head-and-shoulder pattern, a potential price reversal pattern in which any break of the neck line signals a significant change in price. BTC's price fell from $50,000 to nearly $35,000 when it broke the neck line on May 15, 2021.

On-chain analysis

On-chain analysis considers verified and recorded data on the blockchain to predict trends and gauge market sentiment. In other words, on-chain research involves monitoring how money moves across the blockchain to identify potential investment opportunities. It is unique to the crypto world because other asset classes do not run on the public ledger. You can perform on-chain analysis to determine why different market participants buy or sell a given asset. Here's an example.

An on-chain analytics platform like Glassnode allows you to view the activities of BTC investors. For example, whether they actively deposit their assets into a centralized exchange (CEX) or withdraw them into a decentralized wallet. Large inflows into CEX indicate they are likely to dump their holdings, while large inflows into decentralized wallets mean they plan to hold on for a while. You can use this information to guide you in making informed investment decisions.

How to analyze on-chain data

On-chain analysis often makes use of multiple metrics, such as active addresses, volume, supply distribution, and lock-in total value related to asset price behavior.

Active address

Analyzing active addresses on a blockchain network can provide insight into user engagement and adoption. Over time, an increase in dynamic addresses indicates a growth in the network user base, while a decrease in active addresses may indicate a lack of interest or adoption. To analyze active addresses, you can track the number of unique addresses that send or receive assets on the network each day or week. It is also important to consider the rate of change of active addresses over time and compare it to other metrics, such as volume of transactions. To track active addresses on the blockchain, you can use a browser such as Etherscan or BscScan.

Trading volume

Volume measures the total number of transactions on the blockchain network in a given time period. You can use it to assess the level of network activity and the need for underlying assets.

Analyzing volume helps identify trends and patterns in user behavior, such as peak volume during periods of high market volatility. You can track the number of daily or weekly transactions on the network as well as the average transaction size and fees to assess volume. Again, this information is available on the blockchain browser.

Supply distribution

Analyzing the distribution of supply on the blockchain network provides insight into how dispersed and concentrated tokens are. Supply distribution measures the distribution of the total supply of cryptocurrencies among holders.

A more evenly distributed supply indicates a more decentralized network, while the concentration of tokens among a few large holders may indicate a greater degree of centralization. To analyze the supply distribution, you can track the number and size of wallets that hold a certain percentage of the total supply of cryptocurrencies.

Total value locking

Total lock-in value (TVL) measures the total value of assets locked in smart contracts or decentralized applications (DApps) on a blockchain network. You can use it to assess the level of adoption and usage of DApps and the need for underlying assets. To check the TVL, you can track the daily or weekly value of assets locked in different DApps on the network as well as the number of users and transactions. It is also important to compare the TVLS of different DApps and networks to identify trends and patterns in user behavior. To check the TVL of the chain and how it compares to the rest of the market, you can use a tool like DefiLlama.

Chain indicator of market behavior

Here are three on-chain indicators of price behavior:

Realized profit or loss

Realized profit and loss (RPL) is an on-chain measure of floating gains and losses realized after the sale of an asset. Once you buy a digital currency, you will incur a profit/loss due to price changes. You determine your RPL by comparing the realized amount to the realized revenue. If the result is positive, you realize a profit; If they go negative, that's a loss.

By tracking the RPL over time, you can gain insight into the behavior of long-term holders and how they view specific assets. For example, it can help identify buying and selling opportunities. If the RPL is high, it could indicate that long-term holders are taking profits and may find it easier to sell, creating potential selling pressure. On the other hand, a low RPL could indicate that long-term holders are holding on to their assets, which could indicate bullish sentiment and potential buying opportunities.

Supply in profit and loss

Profit supply is the number of tokens in the blockchain that are currently in profit -- they were last transferred at a price below the current price. Loss-making supply, on the other hand, is the number of tokens in the blockchain that are currently loss-making -- the price at which they were last transferred is higher than the current price.

You can calculate the supply of profits by determining the last number of tokens to move when the price is below the current price (the price has appreciated since the last asset transfer). During a bull market, most of the supply in circulation is profit supply, while during a bear market, profit supply gradually declines, bottoming out at the end of each bear market.

When a cryptocurrency reaches a price level at which most investors profit, they may be more likely to sell, creating potential resistance. Conversely, when a cryptocurrency reaches a price level where many investors are losing money, they may be more likely to hold or buy more, creating potential support.

Realized market value

Realized market value is a variation of market value that values each unspent trade output (UTXO) based on its previous historical price change, which differs from the current price. Thus, the realized market value replaces the average market value of the asset, echoing the realized value of the tokens available in the blockchain.

The concept behind realized market value is to establish an on-chain indicator that minimizes the impact of lost tokens and value tokens based on the latest state of the account chain. Usually, when coins are lost, the market value does not take them into account.

The realized market value differs from the above method in that it revalues each last moved asset to its most recent value. So if you spend the asset at a higher price than the last time you transferred it, it will revalue to a higher price and increase realized capitalization accordingly.

Three tools for data analysis on the chain

Here are three tools for on-chain data analysis:

Glassnode

Glassnode is one of the most popular on-chain analytics tools that provides insight into the cryptocurrency market through on-chain metrics. Founded in 2018, Glassnode is dedicated to simplifying the research process and helping users make decisions by providing them with market intelligence and related on-link data.

Widely known for its comprehensive reporting on various digital currency market indicators, Glassnode has multiple apps to stay ahead of the curve in revolutionary ways. Its real-time data presents numerous charts and dashboards with in-depth analysis of wallet activity, balances, network growth, token supply, number of holders, and more.

Main characteristics

Multiple on-chain market Metrics for over 900 assets Over 200 metrics Customizable dashboards with the ability to merge more metrics Compare various metrics for available assets TradingView integrates in-depth resources on popular networks and assets

price

Glassnode supports the following pricing packages:

Standard - Provides the most basic on-chain analytics and market metrics for crypto enthusiasts. It's free.

Advanced -- Updated blockchain market metrics and futures data for ambitious investors. It costs $29 a month, paid once a year, and comes with a 14-day free trial.

Professional - Provides experienced traders with the most advanced and up-to-date on-chain and futures data. It costs $799 a month, with annual payments.

Organization - A customized program for the organization.

Dune Analytics

Dune is another popular on-chain analysis tool that you should consider. Unlike other analysis tools involving new scripts, you can query the Dune database to collect virtually all on-chain information. Dune is known for querying the Ethereum blockchain through simple SQL. Typically, the platform provides all the necessary tools to query, extract, and display large amounts of blockchain data.

Main characteristics

Easy to understand information and visual charts

Accessing multiple metrics

It extracts the data on the chain and classifies it into an SQL database that can be queried

price

Dune supports three pricing plans:

Community - Support for standard performance and unlimited execution. It's free.

Thug Life - Guaranteed faster (4x) performance, 2000 executions/month, 100 private queries, 10 private dashboards, and 250 CSV downloads/month. It costs $420 a month.

Elite - Provides fastest (8x) performance, 4000 executions/month, 1000 private queries, 100 private dashboards, 1000 CSV downloads/month, and watermark removal. It costs $1,337 a month.

Nansen

Unlike Glassnode and Dune, Nansen combines blockchain data with more than 250 million tagged wallets to provide on-chain analytics. While Nansen is perfect for professional cryptocurrency investors looking for in-depth on-chain research, novices can still use it to learn more about digital currencies.

Main characteristics

250M+ Wallet tag

Depth Dashboard  

Wallet Profiler, ETH trackers, Decentralized Exchange (DEX) transactions and CSV data

You can easily detect patterns and predict price movements

Smart alerts that can be customized

Custom report

Real-time on-chain data of popular networks (such as Ethereum, BNB smart chain, etc.)

price

Nansen supports four pricing schemes:

Standards -- Nansen supported NFT Analytics, DeFi, Wallets, Smart currencies, Wallet and Token watch lists, NFT research reports, Nansen Portfolio, and ten Smart Alerts. It's ideal for cryptocurrency explorers and costs $100 / month per year. VIP - In addition to standard features, the package supports 100 smart alerts, exclusive VIP dashboards, early access to new dashboards, access to research portals, advanced dashboards, and personalized training. It charges $1000 / month per year and is ideal for professional traders.

Alpha - In addition to VIP features, the Alpha package supports institutional research, Exclusive Discord communities, white glove support, 1:1 training, weekly conference calls, and exclusive in-person events. It is ideal for full-time investors and charges $2000 / month per year.

Enterprise - Customize Nansen access to your needs at a customized price.

conclusion

At a time when blockchain is transforming digital value, the value of data is critical and the importance of on-chain analytics must be addressed. Multiple platforms such as Glassnode, Dune, and Nansen have emerged, providing cryptocurrency investors with a wealth of easy-to-use on-chain metrics and data sets. However, the insights and alerts you get from these tools can only be used as auxiliary factors to guide your investment decisions -- and they're not foolproof.

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