If you want to learn about on-chain analysis but don’t know where to start, look no further! MoneySmart has prepared “The Ultimate On-Chain Data Analysis Guide” just for you. Let’s cover the basics and implications of on-chain indicators so that you can hit the ground running.
What Is On-Chain Data Analysis?
On-chain data is the data of transactions recorded on the blockchain network, which are irreversible in nature. Once the record is written down, no one can alter the record.
So what can it do for you? By analyzing and visualizing transactions through charts and graphs, on-chain data gives you a holistic perspective on market movements.
What’s the Difference Between On-chain and Off-chain Data?
On-chain data is transparent, immutable, and reliable. It’s available to everyone in the network, revealing the behind-the-scenes of how the market is behaving over time.
Off-chain data, on the other hand, is the transaction data kept on a private network server. The data is then only accessible by the server provider. It’s not transparent, and there’s a chance the data can be altered under the centralized setting.
How Does On-chain Analysis Work?
On-chain analysis is like a detective game; it tries to catch some hints before the major price moves happen. (Yeah, Sherlock Holmes in crypto!) You can investigate many data sets, including the total market capitalization, exchange inflow and outflow volume, BTC miner’s balance, hash rate, etc.
Before getting lost in numbers and graphs, it’s better to understand the basic market mechanism: Who’s buying or selling BTC? And why is that most of on-chain data are related to BTC?
Like many other markets, the BTC market is comprised of 3 components: demand, supply, and volatility.
Demand: Long-term investors are the major demand.
Supply: BTC miners are the major supply.
Volatility: Traders create the market price movement known as volatility.
BTC is the alpha of the crypto space; most coins will follow its price actions. So most on-chain data analyses are about the BTC network. (But if you understand the principles, you can apply them to other coins as well.)
After understanding the market mechanism, you can dissect the market according to the 3 types of on-chain data that help us monitor the market based on demand, supply, and volatility.
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On-Chain Data Metrics: Market Demand
Total Cryptocurrency Market Cap: The Crypto S&P 500
Total crypto market capitalization is the S&P 500 in crypto. It can show us how big the entire market is. If you’ve found the total market cap is rising, you may want to keep an eye on the market because it means an inflow of capital as a sign of more investors entering the market—a bullish crypto sign.
Active Addresses and Transactions: The Network Growth Metrics
On-Chain Active addresses show the number of active users on a blockchain, which indicates the active usage of the network, and the number is calculated by the addresses that have either sent or received cryptocurrency over that particular month.
An increase in active addresses implies that more users are utilizing the network, which is bullish for the market as a whole.
Hash Rate: The Network Strength Metric
The hash rate is an important metric for evaluating the security of a blockchain network, and the BTC value is highly related to that security because the more secure the network is, the higher value it has.
What is a hash rate, exactly? The hash rate is the amount of computational power used in mining and verifying transactions on Proof-of-Work (PoW) consensus networks. You can think of the hash rate as the difficulty level of decrypting a transaction. The higher the hash rate, the more powerful computers are needed to solve the encrypted transaction and protect the network from malicious attacks.
On the other hand, a decrease in hash rate shows miner capitulation, which is when a huge number of miners shut down their machines for a period of time. This weakens network security.
On-Chain Data Metrics: Market Supply
HODL Wave: The Holding Time Metrics
If you don’t know yet, “HODL” means to hold, which is a widely used jargon in the crypto space.
The HODL wave reveals the proportion of short-term and long-term investors.
Short-term: The yellow zone shows the number of holders within 6 to 12 months;
Long-term: The purple zone shows the holders for more than 10 years.
This shows how confident the investors are. When an increasing number of long-term holders (purple area) emerges, it means more investors are getting more confidence in the BTC and aiming for long-term holding.
Miners are the major sellers of BTC because they earn from reselling BTC they’ve mined.
Miner balance is the total BTC balance held by the miners. It shows whether miners are holding BTC or selling BTC to the market. Simple enough to understand, if the balance drops, it means miners are selling BTC, driving the price even lower, and vice versa.
On-Chain Data Metrics: Market Volatility
Centralized exchanges (CEXs) provide huge liquidity for BTC whales to trade. That means if they want an entrance or exit to the market, they need to transfer their coins into exchanges.
Exchange NetFlow is an indicator that alerts the market before big movements. The metric’s value is calculated by the difference between the inflow and the outflow value. If the bar is green, the inflow is larger than the outflow, and price volatility is expected; if the outflow is red, a lower chance of volatility is expected.
As the name suggests, illiquid supply is the number of BTC that has not been moved for at least 1 year. (Some analysts may see 1-month as illiquid already, but you get the idea.)
The higher the illiquid supply is, the less volatile the market will be because of fewer available sellers in the market.
(Updated on 3 Dec: Over 66% of the total Bitcoin supply hasn’t moved in the last year.)
The transaction count is easy to understand. It literally means the number of transactions done in the BTC network. Higher counts can be understood as more activities happening in the network, implying potential users increase.
Stablecoin Supply Ratio (SSR)
Stablecoins, which drive the ecosystem like energy drives a car, are key to market liquidity. You can quickly convert your crypto into stablecoins, so you don’t have to go through the hassle of converting them into fiat. So, knowing where stablecoins are staying can help predict how the market will potentially move.
Stablecoin Supply Ratio (SSR) measures the percentage of a coin’s market cap relative to the total market cap of stablecoins. It’s, therefore, an indicator of whether most investors are holding crypto or stablecoins. A low SSR value implies a large stablecoin supply and could signal buying potential and a possible price rise.
Where To Find On-Chain Analysis Tools?
Here are the top 7 on-chain analysis tools. Most of them are free, except for the metrics that most advanced traders use. In general, you can still feel the crypto market vibes without paying a cent.
Final Words: Finding More Clues As A Crypto Detective
On-chain analysis is an art form derived from fundamental and technical indicators. If you love finding clues from numbers or hints, you will find this game really fun!
There are plenty of on-chain data metrics that have yet to be covered. So don’t forget to stay tuned for the next post, “The Ultimate On-Chain Data Analysis Beginners Guide: How To Trade With On-Chain Signals.” There’s more to come!
Let’s get money smarter!
Investment involves risks. The information on this website is for educational purposes only and should not be construed as investment advice or recommendations. Therefore, it should not be considered as the basis for making any investment decisions or taking any investment actions.
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