On-Chain Analytics - Part 2: Analysis Function & Metrics

How On-Chain Analysis Works: Key Elements & Factors

On-chain research can be conducted by taking into account an asset's HODL status, market capitalization, and expected future performance.

Market Capitalization

Market capitalization determines the value of a cryptocurrency. A cryptocurrency's price is multiplied by its total supply to calculate the network's overall value. Market capitalization can also be used to assess a crypto asset's market size, adoption, and risk in addition to calculating its net value.

Hold Status

HODL waves are used by analysts to gauge the current trend in the market. A HODL wave is an indication that traders are quickly selling assets or HODLing them. Also, it influences the market's sentiment and HODLers' outlook (i.e., what price they may be expecting in the short or long term).

By analyzing coin concentration metrics, you can also identify "whales" and major investors by using coin concentration metrics. There is a possibility that whales and large investors may manipulate the market by dumping tokens, for example, if addresses control a large percentage of the tokens. As a result, cryptocurrency investment risks can be minimized by analyzing the number of large holders of tokens.

The Most Commonly Used On-Chain Indicators

  • Market Value to Realized Value (MVRV)

A reliable on-chain indicator of Bitcoin market tops and bottoms is market value to realized value (MVRV). Market capitalization divided by realized capitalization is used to calculate MVRV.

When market capitalization to realized capitalization is high, the bitcoin price is near a local high, while when it is low, it is near a local low. In the past, buying bitcoin when MVRV has dropped below one has tended to provide decent returns (reminder to DYOR–this is not an investment invoice, but rather one of many tools that can be employed to time market entries and exits–Past performance never guarantees future performance!). When MVRV increases, it indicates a rapid increase in current sentiment relative to stored value, while when MVRV decreases, it signals a decline in current sentiment.

  • Spent Output Profit Ratio

The Spent Output Profit Ratio (SOPR) provides another perspective on bitcoin market cycles. In 2019, Renato Shirakashi introduced SOPR as a proxy for determining whether holders are ‘in (unrealized) profit’ or–at least on paper–’at a loss’.

The SOPR refers to the ratio between bitcoin's price (at the time that unspent transaction outputs (UTXOs) are spent), over bitcoin's price at the time it was created. As such, it represents roughly the difference between the price paid and the price sold. We can compare the price of bitcoin at the time of a transaction's creation to the price at which the UTXOs were spent every time a transaction occurs. Calculating the ratio between the two is a simple way to estimate whether the bitcoin in the UTXO was profitable or not.

  • Relative Unrealized Profit

According to relative unrealized profit, all bitcoin holders have unrealized profits relative to bitcoin's total value using UTXOs. Bitcoin's market capitalization is divided by the total "gross unrealized profit" of Bitcoin UTXOs (in USD) to calculate relative unrealized profit. Based on market capitalization and realized capitalization, we can calculate relative unrealized profit using relative unrealized profit/loss ratios.

The presence of a high relative unrealized profit historically indicates a market correction and/or a local price top is just around the corner. If relative unrealized profit is low, however, it can often mean that the price has reached a local bottom. In general, a relatively unrealized profit under 40% indicates a historically conservative time to buy. A relatively unrealized profit level of about 30% has historically been pretty close to cycle lows for Bitcoin price (relative to Bitcoin’s halving cycles–Chapter 5 on the left-hand menu).

Similarly, this metric can also be used as an approximate fear and greed index. When investors hold on to growing profits, it can be a sign of greed, as it may indicate overvaluation. When investors are increasingly underwater, they can exhibit fear, which can indicate undervaluation when their unrealized profit is low.

  • Market Cap to Thermocap

As with MVRV, the market cap to thermocap ratio involves a ratio of Bitcoin valuation metrics. To calculate the market cap-to-Thermo cap ratio, divide Bitcoin's market cap by its all-time miner revenue in USD.

When Bitcoin's market cap exceeds its total aggregate security spend, it is generally considered overpriced. Like the realized cap, the thermocap moves relatively slowly and is less volatile than the market cap. In the past, high ratios between market cap and thermocap hint at Bitcoin market tops... On the other hand, historically a low market cap to thermocap ratio may signal whale accumulation phases (generally speaking, local market price bottoms).

  • HODL Waves

The HODL Waves are a set of on-chain indicators that show active supply age bands. Based on the last time period when the BTC supply was moved, each colored band shows percentages that illustrate these coin ages (in their current wallets).

As the colors change from yellow (6-12 months) to purple (more than 10 years), it illustrates the BTC supply that hasn't moved in the last 6 months (1 year, 2 years, etc). The range can therefore be used to estimate the behavior of bitcoin (or another digital asset) long-term hodlers (LTH). Generally, they hold their assets for more than five months or 155 days.

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.