What is on-chain analysis? How do cryptocurrency investors and traders use on-chain analysis?
What is on-chain analysis? How do cryptocurrency investors and traders use on-chain analysis? We all know that cryptocurrencies are unique because they use public blockchains. Unlike banks and other traditional financial institutions, anyone can verify transactions at any time by extracting data from network nodes. This approach is called chain analysis. However, the analysis on the chain is a powerful tool that allows us to understand what is happening on the blockchain network in real time. Who holds the most coins? Are tokens flowing into or out of the exchange? Is the holder profitable? This is the first time in history, which allows the public to understand the health of our financial system in real time. It is conceivable that many investors and traders use these indicators to make smarter decisions.
How do cryptocurrency investors and traders use on-chain analysis?
1. Include on-chain analysis in your transaction
To make full use of on-chain analysis, it is very important to master the latest information. Glassnode, Messari and Coinmetrics are the two latest online analysis services. They all provide some indicators highlighted above.
For those who want to know some examples, we recommend that you visit this free chart when we introduce the indicators used by the analysts on the chain: activity address, transaction volume, miner income, hash rate, adjusted transaction network value (NVT) inventory flow ratio.
On-chain analysis is a very good tool, which can let you understand what is happening in a specific network (such as Bitcoin), but it is not the only tool. The best traders and investors will use a variety of technologies, including basic analysis and technical analysis.
2. On-chain analysis measures network strength
The following indicators provide investors and traders with an overview of the network, including its security, usage and the operation mode of monetary policy. Are long-term fundamentals sound? Is the network growing? These on-chain tools will give us an idea.
Active Address Displays the number of active addresses on the network. Although it does not accurately show the number of users on the network, it shows the number of addresses used by exchanges, miners and individuals. Historically, active addresses are related to prices.
Transaction volume represents the dollar amount of cryptocurrency exchanged between addresses. For example, Bitcoin has now settled more than $13 trillion of transactions.
Daily circulation is the total amount of new coins obtained by miners and stakeholders every day. This shows us that the monetary policy of cryptocurrency is in normal operation. The supply of cryptocurrency is reduced by about half every quarter, reaching its fixed supply of 21 million coins.
The supply distribution shows the percentage of coins held in addresses by size. For example, the number of addresses holding more than 10000 Bitcoins has decreased in recent years, while the number of addresses holding less than 10 Bitcoins has increased.
Miner's income is the sum of newly mined Bitcoin plus transaction costs. High income reflects a healthy network in which miners are encouraged to protect the long-term interests of the network.
Hash rate measures the processing capacity of miners to protect the network. In general, the higher the hash rate, the safer it will be.
3. Chain analysis to see who is buying and selling
Although the above on-chain indicators represent the long-term health of the network, the following indicators can better reflect the short-term to medium-term market behavior. Specifically, they can show how many miners, exchanges and individuals hold. It also shows whether they are making profits or losses at present; An indicator of market sentiment.
For example, if we see a large number of tokens entering the exchange and we know that many long-term individual investors have made huge profits in the past six months, this may indicate that they are preparing to sell and we can see market adjustments.
1. Cointime Destroy
The calculation method of Cointime destroyed is to multiply the number of tokens traded in a day by the previous holding time. In essence, it shows us the turnaround time of a cryptocurrency. The increase in the number of coins destroyed means that the holder is moving the coins out of storage and making profits.
2. Realized profit and loss
Realized gains and losses measure the dollar value of Bitcoin sold at profit or loss. For example, if a coin is purchased at $10000 and sold at $50000, it will be counted as a profit of $40000.
3. Supply in profit and loss
Profit and loss supply shows the comparison between the number of tokens currently in profit and loss status and their last purchase price. In a growing market, more profitable coins than lost ones.
Capitalized adds up the latest purchase price of each Bitcoin in the supply. Compare this with the market value, which is the number of coins multiplied by the current price. When the realized upper limit is higher than the market value, the whole market is in a profitable state.
5. Thermal capitalization
Thermo capitalization is the dollar value of cryptocurrency paid to miners to verify the network. Compared with the market value, over time, the decline of the hot cap indicates that the supply pressure of miners is decreasing, and has little impact on the price.
4. On-chain indicators for evaluating cryptocurrency prices
When you often trade Bitcoin and other assets, you want to know exactly what is happening in the market. Is it a good time to be enterprising or cautious? The following ratios can help you understand the short-term trend of the market.
1. Market value and realized value (MVRV)
Market value and realized value (MVRV) is the ratio between market value and realized capital. For example, historically, the high MVRV of Bitcoin indicates that its price is close to the local maximum, while the low ratio indicates that the price is close to the local minimum.
2. Transaction network value (NVT)
Network value and transaction ratio compares market value and transaction volume. It is the closest approximation to the P/E ratio used in traditional finance in encrypted space. Finally, it aims to compare the basic value of the network with the current price. Low NVT indicates bearish sentiment, while high NVT indicates bullish sentiment.
3. Stock flow ratio
The inventory flow ratio is a model. If the demand for Bitcoin continues to grow at the same rate, it can predict the price of Bitcoin. For example, it predicts that if the adoption of Bitcoin continues unabated, it will reach A $1 million per coin by 2025.
4. Stable currency supply ratio (SSR)
The stable currency supply ratio is the ratio between the cryptocurrency supply and the stable currency supply. In essence, it shows the short-term purchasing power of Bitcoin.
In short, whether you are a long-term investor or a short-term trader, these on-chain tools can provide you with real-time insights and help you make more intelligent decisions. On-chain is a new area of analysis that has not been fully utilized, providing market advantages for early adopters. Not to mention, it shows us the power of an open and transparent financial system. And these on-chain tools are a good way to view the actual situation of the cryptocurrency blockchain. However, when you evaluate which cryptocurrency you want to buy, there are a series of indicators that can help you deal more wisely.