Intermediate Series

How Are Crypto Investors and Traders Using On-Chain Analysis?

How Are Crypto Investors and Traders Using On-Chain Analysis?

Cryptocurrencies are unique because they use a public blockchain. Unlike banks and other traditional financial institutions, anyone can verify the transactions taking place at any moment by extracting data from the network’s nodes. This practice is known as on-chain analysis.  

On-chain analysis is a powerful tool that gives us an insight into what’s happening on a blockchain network in real-time. Who’s holding the most coins? Are coins flowing into or out of exchanges? Are holders sitting in profit? For the first time ever, this gives the public access to the real-time health of our financial system.

As you can imagine, many investors and traders use these metrics to make smarter decisions. 

Contents

  • Incorporating on-chain analysis into your trading
  • On-chain analysis to measure the network strength
  • On-chain analysis to see who’s buying and selling
  • On-chain metrics to evaluate bitcoin’s price

1. Incorporating on-chain analysis into your trading

To make the most of on-chain analysis, it's important to have the most up to date information. Two of the most up to date on-chain analysis services are Glassnode, Messari and Coinmetrics, both providing a number of the metrics highlighted above.  

For those who want to follow along with some examples, we'd suggest visiting this free charting while we talk you through the metric on-chain analysts use:

On-chain analysis is a great tool to give you an insight into what’s going on in a particular network like bitcoin, but it’s not the only tool. The best traders and investors use a combination of techniques, including fundamental and technical analysis

2. On-chain analysis to measure the network strength

The following metrics give investors and traders an overview of the network, including how secure it is, how much it is being used, and how its monetary policy is functioning. Are the long-term fundamentals sound? Is the network growing? These on-chain tools will give us an idea. 

1. Active addresses

Active addresses show the number of active addresses on the network. While it doesn’t show exactly how many users there are on a network, it shows the numbers of addresses being used by exchanges, miners, and individuals. Historically, active addresses have correlated with price. 

2. Transaction volume

Transaction volume represents the dollar amount of a cryptocurrency exchanged between addresses. For example, bitcoin has now settled over AU$13 trillion in transactions. 

3. Daily issuance

Daily issuance is the total amount of new coins that miners and stakers are awarded each day. This shows us that cryptocurrency’s monetary policy is functioning correctly, with supply halving roughly every fours on track to its fixed supply of 21 million coins. 

4. Supply distribution

Supply distribution shows the percentage of coins held in addresses categorized by size. For example, addresses holding more than ten thousand bitcoin have decreased over the past few years, while addresses holding less than ten bitcoin have increased. 

5. Miner revenue

Miner revenue is the sum of newly mined bitcoin plus transaction fees. High revenues reflect a healthy network where miners are incentivised to protect the long-term interests of the network. 

6. Hash rate

Hash rate measures the amount of processing power that miners generate to secure the network. Overall, the higher the hash rate, the more secure it is. 

3. On-chain analysis to see who’s buying and selling

While the on-chain indicators above represent the long-term health of the network, the following indicators are more reflective of the short to mid-term market action. Specifically, they can show how much is being held by miners, exchanges and individuals. It also shows whether they’re in profit or are currently at a loss; telling indicators of market sentiment. 

For example, if we saw a large number of coins move onto exchanges and we knew that lots of long-term individual investors had made a large profit over the past six months, it could indicate they’re preparing to sell and that we could see a correction in the market. 

1. Cointime destroyed

Cointime destroyed is calculated by taking the number of coins transacted in a day and multiplying them by the time they were previously held. In essence, it shows us the turnover time of a cryptocurrency. An increase in cointime destroyed implies that holders are moving coins out of storage and taking profits.

2. Realised profits and losses

Realised profits and losses measure the dollar value of bitcoins that are being sold at either a profit or loss. For example, if a coin was purchased for $10k and sold for $50k, that’s counted as a $40k profit. 

3. Supply in profits and loss

Supply in profits and loss shows the number of coins currently in profit or loss compared to their last purchase price. In a growing market, more coins will be in profit than loss. 

4. Realised capitalisation

Realised capitalisation adds together the most recent purchase price of every bitcoin in supply. Compare this to the market capitalisation, which is the number of coins multiplied by the current price. When the realised cap is higher than the market cap, then the overall market is sitting in profit. 

5. Thermo capitalisation

Thermo capitalization is the dollar value of the cryptocurrency paid to miners for validating the network. Compared to the market cap, the decreasing thermo cap over time shows that the supply pressures from miners are declining and having less of an impact on the price. 

6. HODL waves

As you may know, ‘hodl’ is an endearing term for investors who hold their coins for the long term rather than trading them. HODL waves illustrate the percentage of bitcoin that has been held for different time periods, from less than one month to more than seven years. For example, the amount of coins held for more than seven years has grown considerably, showing that ‘hodlers’ are controlling a growing portion of the network. 

4. On-chain metrics to evaluate a cryptocurrency’s price

When you’re trading an asset like bitcoin frequently, you want to know exactly what’s going on in the market. Is now a good time to be aggressive or cautious? The following ratios can help give you an idea of the short-term trends in the market. 

1. Market Value to Realized Value (MVRV)

Market Value to Realized Value (MVRV) is the ratio between the market capitalisation and realised capitalisation. For example, a high MVRV for bitcoin has historically signalled that its price was near a local maximum, while a low ratio has indicated that price is near a local minimum.

2. Network Value to Transaction (NVT)

The Network Value to Transaction ratio compares the market cap to the transaction volume. It’s the closest approximation in the crypto space to the Price to Earnings ratio used in traditional finance. Ultimately, it aims to compare the fundamental value of the network to the current price. A low NVT shows bearish sentiment, while a high NVT signals bullish sentiment. 

3. Stock-to-flow ratio

The stock-to-flow ratio is a model that gives a price prediction for bitcoin if its demand continues growing at the same pace. For example, it predicts that if bitcoin’s adoption continues unabated, it will hit AU$1 million per coin by 2025. 

4. Stablecoin Supply Ratio (SSR)

The Stablecoin Supply Ratio is the ratio between a cryptocurrency’s supply and stablecoin supply. Essentially, it shows the short-term bitcoin buying power. 

Whether you’re a long-term investor or short-term trader, these on-chain tools can give you real-time insights and help you make smarter decisions. On-chain is a new field of analysis and hasn’t been fully utilised, giving early adopters an advantage in the market. Not to mention, it shows us the power of an open and transparent financial system. 

These on-chain tools are a great way to see what’s actually happening on a cryptocurrency’s blockchain. Still, when you’re evaluating which cryptocurrency to purchase, there is a range of metrics that can help you trade smarter. Traders often reference these five key financial metrics along with the Relative Strength Index Indicator (RSI). You can learn more in our article about the three types of cryptocurrency analysis.