Analyzing on-chain data

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If it were possible to give a definition of what the financial market is, this would be the place where buyers and sellers find themselves reflecting human behavior in the process of searching for asset pricing.

Going a little deeper, it can be said that market participants seek to analyze the information available, through the use of various tools, to find inefficiencies that help them to make decisions that lead them to have a strategic advantage over other participants.

Perhaps the most widespread way of pursuing this objective is Price Action, which, through the graphics, studies the price action by identifying regions of supply and demand, the strength of a trend and the moments of overbought and oversold. This methodology can be used to analyze any asset and can be very useful if used well.

We can also carry out macroeconomic studies (macro analysis), observing the entire context in which an asset is located, seeking to identify and take advantage of macro trends. Here, for example, geopolitical events and monetary policy decisions by central banks are taken into account.

Another study model is fundamentalist analysis, which seeks to investigate the fundamentals of a project or a company. In this model, it is possible to observe whether the product or the related proposal
has demand, what problem it proposes to solve, team composition, tokenomics, competitors, governance, among others.

In the crypto market, we have the option of a unique type of analysis,
THE CALL ON-CHAIN ANALYSIS.

It is possible thanks to the transparency that a public blockchain provides, such as Bitcoin and Ethereum, as it allows the collection and observation of native data that can assist the investor or trader in the decision-making process, representing a treasure trove of open and incorruptible data. .

A well-executed on-chain analysis seeks to understand the level of economic activity of a network, detecting details about the level of use of a network, the number of holders, information about mining and a wealth of other references that would be impossible to obtain for traditional assets, such as stocks. Although this information is publicly available, few know how to properly study it.

FEATURES OF THE CHAIN ANALYSIS:

  • Possible data to be obtained through this analysis include:
    Details of each block (date / time, fees, miner's rewards, block size, addresses, users, etc.).

  • Details of each transaction, shipping and receiving addresses, amount transferred in each transaction, time the amount was withheld, etc.).

  • Volume traded in a given period of time, balance in exchanges, checking if the network is actually being used and in what proportion.
    Miners' spending behavior.

  • Demand for HODL, examining how long an address has not negotiated its crypto. If an increasing number of investors are HODLing, then we can assume that the current supply is lower, which should increase the price if demand is constant and also points to confidence in the future performance of the asset.

Although on-chain analysis is more interesting for those looking for directional movements, its combination with traditional macro, fundamental and technical analysis can create a powerful tool in the search to identify the fair price of a crypto.

Next, we will analyze some of the main indicators of on-chain analysis.

NUMBER OF ADDRESSES WITH MORE THAN 1,000 BTC

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It is reasonable to assume that holders and managers of large amounts of capital (whales) have a better understanding of the market and sometimes even insider information.

Through different types of risk management and leverage tools, they are able to expose themselves to the market much more assertively than the average investor, buying and making profits at the right times most of the time.

Thus, using some data that is only possible thanks to the on-chain analysis, we managed to keep an eye on the movement of these players and try to follow their movements.

By observing the number of addresses that have more than 1,000 BTC, it is possible to know if there is a retention or expenditure of BTC by large investors, as there are probably not many people with the capacity to handle large amounts, which we can presume to treat- institutions.

The following graph shows the number of addresses with more than 1,000 Bitcoin. We can clearly see that, although there was a liquidation during 2017 and 2018, institutions are still buying and heavily. Since the beginning of 2019, the number of addresses with more than 1,000 BTC has increased by more than 50%.

Essentially, it went from less than 1,750 addresses to a maximum of almost 2,250 addresses.

Number of addresses with more than 1 BTC

Since the December 2017 price spike, the number of addresses with more than one Bitcoin has increased by about 10%, from 718,000 to 787,000. This means that more people want to have a single Bitcoin.

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HODL WAVES

In the graph below, these colored bands give us an indication of the amount of BTC that was last traded within a specific time window, indicated in the legend. The strongest colors at the bottom (red and orange) represent recent transactions, while the cooler colors at the top (purple, blue and green) represent the amount that has not been traded in a long time. This On-Chain analysis helps us to understand the long-term behavior of Bitcoin holders, showing the addresses that received BTC and did not spend it afterwards.

The number of enthusiasts who maintain between three and five years or more, has shown the fastest growth rate. The two groups combined represent more than 20% of all Bitcoin addresses. It's amazing how many people have resisted for a long period of time, considering the short duration of Bitcoin.

The number of Bitcoin addresses for less than a year during these periods has increased substantially. About 40% of all addresses have traded Bitcoin in the past 12 months.

Therefore, what is expected is that smart money will accumulate during bear markets and sell during bull seasons, much like what I concluded in the previous point, when examining the number of addresses with more than 1,000 BTC.

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EXCHANGE INFLOWS

When analyzing this data, we can start with the following premise:
Investors typically transfer currencies from their portfolios to exchanges when they want to settle their assets. Therefore, an increase in the entry of BTC on exchanges in a bull market can be considered a sign of lack of conviction on the part of investors in the continuation of the trend and a possible reversal about to happen.

However, as the graph shows, when there is a decrease in the amount of coins sent to exchanges, it means that further upward movements are about to occur, either in a reversal or in a continuation of the trend.

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BITCOIN HISTORICAL TRANSACTIONS

The number of transactions confirmed daily highlights the value of the Bitcoin network as a way to transfer funds safely and without intermediaries, demonstrating that more people are interested in the cryptocurrency.

Looking at the graph, which shows the data between 2010 and 2020, we can see the upward trend in the number of transactions. They peaked at around 490,000 per day in December 2017 and a minimum number of approximately 132,000 transactions per day in early August 2017.

In December 2020, about 330,000 daily transactions were carried out and in January 2021 there was a peak of around 400,000 in early January 2021. This is higher than the transaction activity of other cryptocurrencies during the same time, but significantly less than its rival: Ethereum. That particular coin would be processed more than 1.1 million times a day.

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MVRV

Metric that compares the market value of Bitcoin with the realized value, an average of all value paid by the BTC that are in circulation today, giving us an approximate number of all the value that has already been injected into the market.

It is an alternative approach to assessing the network.

Unlike market capitalization, which multiplies the amount of a currency in circulation by the last price traded, but does not take into account that not all units were purchased at the price found at the time of calculation, the MVRV approximates the amount paid for all the existing currencies, adding to the market value of the currencies at the time they were last moved on the blockchain.

It is useful to get a sense of when the negotiated price may be below fair value and to identify the tops and bottoms of the market.

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NUMBER OF ACTIVE ADDRESSES

Bitcoin addresses show the behavior of holders of crypto, providing the number of unique and active addresses in successful transactions on the network, as sender or recipient.

The data shows that not only is there a growing increase in interest from people in general, but that the fall between the high end of 2017 to the present is not very significant.

Essentially, the number of active addresses has dropped by about 25%, while the price has fallen by 66% in the same period, suggesting that long-term users of the cryptocurrency continue to use the network, even with price fluctuations.

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LIQUID AND ILLIQUID SUPPLY

With 88.5% of the total supply of BTC already extracted, the vast majority of the existing 18.6 million BTC are not in circulation. And as the graph illustrates, this proportion has only been increasing over time.

The purpose of this metric is to assess Bitcoin's net and illiquid supply and its relationship to price. Three categories of liquidity are classified: highly liquid, liquid and illiquid. This methodology suggests that currently 14.5 million BTC (78% of the supply of Bitcoin in circulation) are not liquid in the market.

Only 4.2 million BTC (22%) are in constant circulation and available for purchase and sale and this trend increased throughout 2020, strengthening the upward movement that was observed.

So understanding Bitcoin's liquidity is an important macro signal that has been proven to have a clear relationship to price.

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WHERE TO GET ON-CHAIN DATA

It is possible to carry out on-chain analysis using data science and programming techniques, but there are also simpler ways, such as using websites and analytical platforms that compile and make this information available for free or, in other cases, for a fee.

In both cases, what will make the difference is familiarity with the fundamentals and dynamics of how a blockchain works.

Some examples of where you can get blockchain data are listed below:

COINMETRICS

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He is one of the pioneers in the use and application of on-chain metrics. It provides free data on 37 cryptocurrencies, including information on correlations between them.

The site also provides an area with very interesting and informative articles and researches.

Look Into Bitcoin

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Website that provides graphics, models and updated information on the market cycle and on-chain analysis.

The website consists of three main sections: learning, live graphics and indicator alerts.

GLASSNODE

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It provides the basic metrics of the network free of charge along with some indicators.

In order to obtain better tools, it is necessary to opt for the paid versions that ite offers, which makes the analysis of the data in the chain more functional.

INTOTHEBLOCK

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It offers a wide range of analytical tools, including on-chain analysis for a variety of pritoactives, as well as data from exchange offer books and sentiment analysis. The company uses marchine learning and statistical modeling to provide its data.

SANTIMENT

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It offers a wide range of metrics, explanations and visualizations of on-chain data. The Sanbase spreadsheet plug-in allows you to fetch data over the network using Google Sheets. As with most other data providers, there are free and paid membership options.

CRYPTOQUANT

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Tool with a very good layout and that provides information through various metrics. The free version offers the latest asset information, but there are several options paid for with more advanced tools and features.

CHAINALYSIS

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It is a complete platform for providing data, services and research to large companies, financial and cybersecurity institutions in more than 50 countries. The focus is to offer investigation, compliance and risk management tools for analyzing cyber criminal cases, but also for the consumer access to the universe of cryptocurrencies with security.

BLOCKCHAIR

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It is a search engine and blockchain explorer that shows network activity, details of each block / timestamp, fees, miner's rewards, block size, addresses, users, etc.).

In addition to Bitcoin it also provides data on Ethereum, Ripple, Litecoin, Bitcoin Cash, Cardano, Stellar, Bitcoin SV, EOS, Moreno, Tezos, Dash, Zcash, Dogecoin, among others.

WHAT ARE THE LIMITATIONS OF ON-CHAIN ANALYSIS?

Despite having its advantages, on-chain analysis is still in its early stages. There is just over a decade of data to support Bitcoin's historical analysis and even less data to
most recently released cryptocurrencies.

So, it is possible that the interpretation of these metrics will adjust over time to take into account changes in the activity of
jail.

As we have seen, on-chain data analysis is a very engaging and interesting way of analyzing the market, due to the transparency of the blockchain and for running away from conventional ways.

However, it is necessary that the data derived from it are not taken as an absolute truth, as the market will always be sovereign, being able to act irrationally and go totally contrary to what was previously analyzed.

Therefore, develop your look to understand information from within the network and gain one more ally to refine your decision making, specializing in only one type of analysis or using a little of each of them in the decision-making process.



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