On-Chain Analytics Guide
Market Meditations | April 26, 2021
Welcome to part 1 of our Fundamental Analysis (FA) Guide. Why write this guide now?
This past weekend, on Technical Analysis (TA) alone, the Bitcoin chart printed bearish market structure, printing lower highs and lower lows. Being able to read a series of on-chain indicators properly, however, would have indicated that the correction is coming close to its end. In fact, on Friday certain key FA indicators such as the negative perpetual funding rates or miners net position change printed a strong buy signal.
Those who were able to read fundamental indicators had access to more information and thereby the opportunity to profit through market action. FA takes a big picture approach by looking at an asset’s intrinsic value. In traditional markets, this involves investigating a company’s balance sheet and earnings report whilst in crypto it involves looking at a variety of factors. We cover some of these factors in our 2 part series. OUR GOAL: by the end of this 2 part series, you’ll be able to do the same.
On-Chain analytics refers to a range of metrics that can be observed by looking at data provided by blockchains. We could access this information ourselves by running a node for the desired network and then exporting that data. Fortunately, there are many websites that do this for us. We will now consider some of the most common on-chain indicators and websites you can use to access the information.
1️⃣ Exchange Inflow & Outflow
WHAT IS IT: By tracking exchange inflows and outflows, we can see whether big money is moving coins onto exchanges in large quantities (suggesting that they plan to sell coins), transferring stablecoins onto exchanges (suggesting that they plan to buy the dip) or whether a large number of coins are moving off exchanges (suggesting that they plan to hold coins in the short term).
WHERE TO GET STARTED: This type of information is accessible on a variety of different platforms an example of which is CryptoQuant. It’s as simple as reading a line chart, however focus on understanding the bigger trend at play or sharp anomalies. For example during a bull market it’s common to see a downtrend in exchange inflows with sharp spikes during healthy corrections, as we saw this weekend. For more about this platform, check out our podcast with Founder of CryptoQuant, Ki Young Ju. Alternative platforms include Nansen.ai
2️⃣ Number of Transactions
WHAT IS IT: One thing that gives crypto immense value is the network effect, the idea whereby the value of a product increases as more people adopt and use it. Simply put, if more people are using a network, that is healthy. If fewer people are using a network, that’s something to be cautious of. When the number of transactions rises, it often correlates with rising prices.
WHERE TO GET STARTED: Blockchain.com plots number of transactions: link here. With this indicator in particular, it’s very easy to get lost in the noise. A good way to filter out important information is by plotting the number of transactions with a moving average to see how activity evolves over time. You’ll see on the link there are options to select ‘7 Day Average’ and ‘30 Day Average’
3️⃣ Active Addresses
WHAT IS IT: When you first bought crypto, whether through a centralised exchange like FTX, FTX U.S or a decentralised platform like MetaMask, you would have had to open up a wallet, which contains a unique address, for every coin you purchased. By tracking active addresses (the number of unique addresses that were active in the network either as a sender or receiver) we can gauge the level of new adoption and activity and understand how many people are using the network. The more people who open wallets the bigger the network effect becomes.
WHERE TO GET STARTED: Glassnode plots active address: link here. You can use the dropdown menu to view whatever asset you like. The metric is specifically calculated as the number of unique addresses that were active in the network either as a sender or receiver and only addresses that were active in successful transactions are counted. This indicator is NOT helpful for day-traders or scalpers but rather more pertinent for long term investors. You’ll notice during a bull market, the number of active addresses rises exponentially.
4️⃣ Fees Generated
WHAT IS IT: Revenue in the crypto world is measured by fees generated. When more fees are generated, this signals higher network activity. Developers building on projects need to pay fees. People sending and receiving coins on the network pay fees. More fees indicates higher usage.
WHERE TO GET STARTED: Cryptofees is a resource that lists the 1 Day and 7 Day Average number of fees in descending order for a variety of projects. You’ll notice that the ones at the top of the list correlate the coins that have done particularly well to date during the bull market. If you prefer to review this data in graph form, you may do so on Coinmetrics.
5️⃣ Hash Rate
WHAT IS IT: Hash rate is the measuring unit of the processing power of a network. The higher the hash rate, the more secure the network is. When the hash rate increases, this indicates that more resources are being dedicated to processing transactions on the network, and if hash rates increase over time this can signify that there is a growing interest in mining. When hash rates decrease, it can mean that the profitability of processing transactions has declined due to increased overhead in the form of computing power. This puts the security of the network at risk.
WHERE TO GET STARTED: To view hash rates you can also use, Blockchain.com: link here. To deep dive further, here is a great article that explains the intricacies of Bitcoin’s hash rate in more detail. In general, if you’ve invested in an asset you want the hash rate to be on a steady increase as it signifies greater security.
6️⃣ Total Value Staked
WHAT IS IT: Whilst proof of work rewards miners for solving complex problems in order to validate transactions, proof of stake rewards an individual that creates the next block on the blockchain based on how many coins they’ve staked. If that’s confusing, the only thing you need to know is that when you stake coins, you lock them up for a fixed period which means you can’t sell them. If the total value staked of a project continues to increase, this suggests that selling pressure for that coin is on the decline.
WHERE TO GET STARTED: StakingRewards is a user friendly platform to check out staking data. And, let’s not forget that we can also benefit directly by staking ourselves and earning rewards. Here’s a great step-by-step explanation from FTX that illustrates how you can stake $FTT. For more passive income opportunities, check out our Passive Income Video.