Investing in financial markets, whether it be stocks, forex, or cryptocurrency, requires a deep understanding of market trends and analysis.
Despite the growing interest and adoption of cryptocurrency, statistics show that only a tiny percentage of the global population, 4.2%, are crypto users, and this percentage would definitely be even lesser if we look beyond mere users to those who have a comprehensive knowledge of DeFi and technical analysis to effectively trade in the crypto market.
This implies that although crypto interest and adoption are increasing exponentially, a staggering majority of the global population is still unaware of how DeFi and the crypto economy work.
One of the major reasons for this is the lack of understanding of fundamental analysis. It is hard to comprehensively analyze cryptocurrencies and know the right ones to trade or invest in per time without having significant knowledge of blockchain and technical analysis.
The majority of small-scale investors and holders in the cryptocurrency market barely have any knowledge of the value or utilities of the tokens they invest in.
They mostly base their investments on “expert” tips and signals on how those particular coins and tokens have germinable tendencies, and with the popular knowledge of how well popular coins like Bitcoin and Ethereum have grown over time, most people invest impulsively driven by FOMO (fear of missing out).
The “Shitcoin” era of 2020-2021 is a prime example of this, where ignorant investors were lured into buying cryptocurrencies with little to no understanding of their fundamentals.
Thus, prospective investors who come into the crypto space with the primary aim of making money and growing their financial portfolios tend to invest blindly, rely on signals, and sometimes even lose their funds to scams in the process.
On-chain analysis offers a solution to this problem by allowing investors to focus on the fundamentals of a cryptocurrency network rather than relying on signals from others. This approach empowers investors to make informed decisions and be their own bosses.
This article is primarily aimed at helping prospective investors who want to understand the right coins or trades to take by themselves instead of looking for signals. It also offers more information to individuals already conversant with the topic.
The article provides a comprehensive overview of on-chain analysis, one of the key ways to understand cryptocurrencies and DeFi and make informed decisions in the crypto market.
What is On-Chain Analysis?
You must first know that one of the prominent features of a blockchain is that it is a public ledger that records and stores transactions, and by virtue of it being public, these transactions and trades can be viewed and accessed by everyone.
There are two types of data in the cryptocurrency space: on-chain data and off-chain data.
Data from off-chain transactions are usually not entirely executed and recorded on the blockchain. Centralized exchanges like Binance or Kucoin sometimes provide data publicly or privately but fully off-chain because it is not visible on a public ledger.
The disadvantage of this is that although deposit and withdrawal transactions are verifiable, analyzing blockchains with this method alone requires trusting a system that may be faulty and eventually enable wrong investment decisions.
With on-chain data, however, every transaction is publicly recorded and available on the blockchain. All transfers, swaps, token staking activities, and smart contracts activity can be read and analyzed, and they are valid without requiring trust in any third party.
The financial information of a public blockchain is open and immutable, making it easier to track, collect, and study. All transactional activities that occur in a public blockchain are recorded for transparency. This includes every transaction on the public network, whether swap transactions (BUSD to BNB, for example) on a decentralized exchange (DEX) like Pancakeswap, a liquidity-providing transaction on yield farming protocols or staking pools, or even the minting of NFTs.
On-chain Analysis uses this public blockchain data to help traders and investors examine the current price, tokenomics, and other fundamentals of tokens and forecast movements pump or dump within the blockchain.
On-chain analysis utilizes this public blockchain data to help traders and investors evaluate the current price, tokenomics, and other fundamentals of tokens, as well as predict price movements and identify profitable opportunities. The data includes information on token fundamentals, transactional activities, wallet balances, and transfers, especially of whales within the network, as well as to other blockchains.
This advanced level of DeFi and crypto market research provides deeper insights and price signals, enhances trading opportunities, and ultimately leads to better investment and trading decisions.
Types of On-Chain Data
On-chain data can be broadly classified into three categories:
- Transaction data (e.g., sending and receiving address, transferred amount, remaining value for a specific address)
- Block data (e.g., timestamps, miner fees, rewards)
- Smart contract code (i.e., coded execution logic on a Blockchain).
Benefits of On-Chain Analysis
The primary advantage of on-chain metrics is that they provide deep insights into investor behaviour and the health of crypto networks through real-time data. This information helps traders identify opportunities for investment.
Investors and traders can benefit from on-chain metrics in the following ways:
- Monitoring Token Growth: Cryptocurrencies are native assets of blockchains (e.g., ETH on the Ethereum blockchain and SOL on the Solana blockchain). Tokens, on the other hand, are created using smart contracts and derive value from the blockchain’s economic system and protocol design.
Analyzing metrics such as total transactions, active wallet addresses, and on-chain volume helps investors make informed investment decisions by tracking the usage and position of tokens. For example, a sharp increase in active addresses and transactions can indicate a rise in token prices.
- Liquidity Metrics: Experienced investors often rely on liquidity metrics like increase, decrease, and movement to determine the best chains to invest in at different times.
- Understanding Liquidity Flows: On-chain analytics can also provide insights into how liquidity flows between protocols over time. For instance, a network with low liquidity may result in a decline in value for associated protocols and tokens.
- Decentralized Exchange Protocols: Metrics like total exchange volume and average transaction size can be used to analyze decentralized exchange protocols like Uniswap.
How to Properly Utilize On-Chain Analysis
There’s a plethora of analytics tools available to crypto investors and DeFi analysts to enhance their token or markets analysis, some of which include:
Nansen is a crucial analytics tool that enables users to explore the activities of wallet addresses on the blockchain. This tool helps identify token flows between key participants, money transfers and deposits, and NFTs that may experience significant price increases.
Nansen is built on the Ethereum blockchain and combines on-chain data with a sizable and continually expanding database containing millions of wallet labels. Nansen provides features like real-time dashboards and notifications, which crypto investors can use to find opportunities, research, and protect their assets.
Dune Analytics is another excellent platform for crypto data analytics. It allows users to generate and share analyses of Ethereum data by transforming data from smart contracts into a human-readable format.
On Dune Analytics, a variety of technologies can be used to access, extract, and visualize large volumes of data from the blockchain. Dune Analytics also allows users to create a variety of dashboards using SQL queries. It is a valuable tool for token analysis and project research.
The use of block explorers is also a popular way to conduct on-chain analysis, and Etherscan is a well-known block explorer on the Ethereum blockchain. It allows users to explore all transactions, contracts, and wallets on the Ethereum chain.
Etherscan also enables whale wallet tracking for ERC-20/ERC-721 tokens, making it easy to track their activities – the tokens they buy and when and how they buy them.
Other valuable features of Etherscan include checking for Verified Contracts (i.e., to be sure that the contract code you see is the same code deployed on the blockchain), interacting with protocols, and even minting of NFTs directly from the contract using the Contract Address on Etherscan.
Other platforms that offer excellent analytics and coin metrics tools for fundamental research and analysis of tokens on-chain include Glassnode, CoinMetrics, Debank, Messari, and DeFi Planet.
Glassnode primarily provides wallet insights, Messari allows investors to check the funds raised for upcoming projects, and DeFi Planet provides Fundamentals/Coin Metrics via its Markets Pro feature. This feature enables investors to analyze a wide variety of cryptocurrencies using data from tools such as Coin Prices, Crypto Exchanges, and Crypto Analyzer.
In conclusion, these tools provide investors and DeFi analysts with a wealth of information to enhance their analysis of tokens in the Crypto market. With the help of these tools, they can make informed decisions and maximize their returns.
Limitations of On-Chain Analysis
As good and valuable as on-chain analysis has been painted out to be in this article, it must also be stated that it is not without its limitations.
- The blockchain technology used by different cryptocurrencies can impact the accuracy of on-chain analysis. For instance, Ethereum’s blockchain is utilized for a wider range of activities, including the provision of applications known as smart contracts, whereas Bitcoin is focused on being a form of digital gold. Based on these differences, it might be difficult to analyze both cryptocurrencies because various conclusions can be drawn from a given statistic.
- Additionally, on-chain analysis is primarily useful for longer-term market cycles, making it less suitable for short-term traders. However, short-term traders can still benefit by comparing on-chain findings with technical analysis data to identify critical support and resistance levels.
- Layer 2 scaling solutions–zkRollups for Ethereum, for example, have the potential to change how we currently assess transaction volume on-chain and distort metrics that depend on it. As a result, the interpretation of on-chain indicators may change over time to accommodate these changes in blockchain activity.
- On-chain analysis is a method of evaluating the financial health and stability of a cryptocurrency by examining its blockchain data, including its fundamentals, transactions, and whale wallet balances and transfers.
- Investors can benefit from on-chain analysis by using AI-powered tools such as Nansen, Dune Analytics, Etherscan, and Debank, which simplify the process and provide more comprehensive insights.
- However, it’s worth noting that on-chain analysis has limitations, as the unique features of various blockchain networks can make it challenging to compare and analyze them together.
- Additionally, the information obtained through on-chain analysis may not be useful for traders looking to make quick profits through scalp or short-term trades.
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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