What is On-chain Analysis?

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What is On-chain Analysis?

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The on-chain analysis is a new concept that was introduced by blockchain-based cryptocurrencies and their new features. Every single transaction data is stored on the blockchain system and kept on its public ledger. This data contains insights into different aspects of the crypto market and how traders and investors are regarding the market situation.

As a trader, you can employ the data that blockchains offer in your analytics, studying how other market members are behaving and managing your moves accordingly.

What is on-chain analysis?

With public blockchains, like Bitcoin and Ethereum, transaction data is accessible to everyone. You can see the number of coins in an address, check the age of the address, and review the history of its transactions.

Market members can analyze this data to get insights into market sentiment. Let’s see how it works with an example:

We know the address of a Bitcoin Whale, meaning it contains a large number of Bitcoins. Let’s call the owner, Alice. Alice’s behavior can be quite important as it can have effects on the market prices.

During bear markets, for instance, where traders and investors have a tendency to sell their assets, Alice chooses to keep her Bitcoins. She believes that the market situation is temporary and the price of Bitcoin will increase in the near future. Retail investors may look to Alice for insights as she is one of the main investors in the Bitcoin market. They may take her confidence in the future of Bitcoin as confirmation the market situation is temporary.

On-chain metrics don’t specifically give you a direction. You need to come up with insights based on the information you have. As we saw with Alice, we had to analyze her behavior in a bear market to come up with a decision for our own trades.

Glassnode, Messari, and CryptoQuant are some of the main platforms offering on-chain metrics. Some of the metrics are only accessible through the premium version, however, you can find many of the metrics available for free.

On-chain Metrics

Shortly after the crypto market grew in size, different companies started analyzing publicly available blockchain data and offering tools to traders and investors. They provided their own on-chain metrics which usually track a specific metric within the space.

Let’s take a look at some of them together:

Coin Days Destroyed (CDD)

Coins Days Destroyed allows you to watch how whales are behaving in markets. With this on-chain metric, we can see how crypto whales are spending their crypto assets in markets.

CDD is quite important to track the status of coins that have been kept in a wallet for a long period of time. In other words, it allows us to watch market members who bought and kept a specific token long before to see when they’re going to start to sell. Their selling indicates a change in the HODLer’s behavior which is notable for the markets.

CDD is calculated by multiplying the number of tokens moved by the total number of days they were kept unspent. A dropping CDD indicates that HODLers and whales are feeling more confident in the market and are choosing to keep their tokens. An increasing CDD, on the other hand, shows strong confidence in the markets as HODLers are keeping on to their assets.

Exchange Flows

With this metric, we can see where traders are keeping their assets: inside a cryptocurrency exchange or in their own wallets.

As the name suggests, Exchange Flows show how many crypto tokens are being transferred to or from an exchange. Inflows refer to the amount of funds being transferred to a crypto exchange while outflows refer to the assets exiting the exchange.

Exchange inflows and outflows usually change based on market sentiment. Inflows to exchanges increase as traders move their tokens to crypto exchanges. This is a bearish sign as it indicates that people are probably going to sell.

Outflows from exchanges rise as traders move their tokens to their crypto wallets. This is a bullish sign as it shows that traders are planning to hold.

Stablecoin Exchange Reserve

This is a very useful on-chain metric to track stablecoins and measure the buying pressure within the markets.

Due to lower volatility compared to other crypto assets, stablecoins are usually used frequently by traders. During market volatility, traders change their crypto assets to stablecoins to hedge them against sharp price movements. As the markets turn back to their usual state, they usually use these stablecoins to buy their desired crypto asset again.

Stablecoin Exchange Reserve is an on-chain metric that shows the number of stablecoins present on an exchange that potentially can be used to buy cryptocurrencies. A high value for this measure is considered Bullish as it indicates that investors and traders within the market are planning to buy more crypto assets.