On-Chain Analytics - Part 3: Using On-Chain Analysis

How to Use On-Chain Analytics to Improve Your Trading and Investing or to Evaluate a Coin/Project

When using on-chain analysis, keep these three things in mind.

  • Which Bitcoin network participant–public ‘address’--do you want to monitor? Large investors (whales), addresses associated with known crypto exchanges/trading platforms, miners, investors, etc., are examples of addresses monitored by the market.
  • What factors and incentives drive investment/accumulation? It could be profits and losses, income generated, media coverage/market froth, Satoshis accumulated, etc.
  • How particular blockchain decisions are made. (Fees paid, transaction volume, difficulty adjustment, node/miner/staker activity (and distribution, decentralization, etc), wallet balances, coins/wallets idle, etc.)

Up-to-date information is essential for on-chain analysis.  Glassnode, Messari, and Coinmetrics are three of the most current on-chain analysis services, each providing many of the metrics mentioned above. In addition to looking to these data providers for raw data, many bitcoin investors turn to On-Chain analysts for their extrapolations on the raw data as well: As mentioned above, Willy Woo is a great option, Plan B as well as younger entrants Dylan Leclair and Will Clemente.

Alternatively, you can run your own node in order to collect on-chain data for a given blockchain. As a node operator, you store and maintain a copy of the ledger yourself, ensure your transactions are broadcast, verify incoming transactions relayed by other nodes, and follow consensus rules. Plus, you’ll be able to query your own blockchain data faster than via a third party.

Identify Future Market Trends

By monitoring investor behavior and network health in real time, on-chain analysis helps traders make better tactical decisions. Being the largest cryptocurrency in the world by market cap, its price movements can often have a domino effect on other crypto assets. In other words, if bitcoin's price rises, other crypto assets tend to follow the rise as well, and vice versa. Due to this, many investors track Bitcoin's on-chain activity closely as ‘alpha’ for subsequent market moves.

With Glassnode (or Nansen, for example) you can track on-chain Bitcoin data at a very granular level, including bitcoin whale movements, futures open interest, mining difficulty, and realized market cap. Registration is free for some metrics, while subscriptions are required for others.

And by looking at the number of active addresses and transactions, crypto traders, for instance, can forecast whether interest in a particular cryptocurrency is likely to increase or decrease. So as the number of addresses and transactions increase, the price of a cryptocurrency is often likely to rise as well.

Analyze Investor Behavior

Moreover, on-chain data can provide insight into a specific investor's habits. The number of people who are HODLing a cryptocurrency may be determined by on-chain analysts, for instance. There is a possibility that as more people HODL the cryptocurrency, the cryptocurrency's liquid supply could also decrease… So in the event that demand remains constant, on-chain research could help predict a rise in price for that coin. Moreover, it demonstrates long-term faith in the asset.

Final Thoughts

A variety of tools are available to help you analyze a blockchain's health, operations, and ‘consumer behavior’. The open nature of public blockchain allows anybody to use these tools, unlike many of the tools used in the ‘gated community’ that is traditional finance. More than a few major crypto investors use these tools to make important investment decisions. And while many of the examples in this article relate to Bitcoin, many are also available for other blockchains. Finally, when you're just getting started with on-chain analysis, you can also take advantage of the free research provided by many data providers.

Blockchain lives on the cutting edge of the financial and technology industries, and as it expands, people from all over the world will bring their knowledge and experience to bear, introducing new ideas and approaches. And this in turn will continue to grow everyone’s respective knowledge base as the industry progresses and develops.

Have fun and always remember to DYOR! Hopefully, the information contained herein helps you do just that.

Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.