Many crypto traders use fundamental and technical analyses to understand market data and price movements before they trade. While these are effective in predicting price actions and gauging market sentiment, savvy investors and market analysts use on-chain analysis.
With in-chain analysis, traders and investors can extract and analyze data directly from a blockchain to determine the best market entry and exit points.
However, this process can be complicated for beginners, so we’ve put together this guide to help you understand on-chain analysis and add it to your crypto market analysis.
What is On-chain Analysis?
As the name implies, on-chain analysis is the process of breaking down data extracted from blockchains. It is also known as blockchain analysis, and it can simply be described as any process that involves examining various data gathered from a particular blockchain network.
Now, let’s break it down.
When you execute a crypto transaction, its data is stored on the blockchain. For example, if you buy or sell BTC or make an online purchase using Bitcoin, anyone can trace and locate the transaction on the Bitcoin blockchain because it is open-source and permissionless.
If they do, they’ll get information such as your address (as the sender) and the receiver’s address, the transaction amount, and the time the transaction was done. However, it’s not only transaction data that gets stored on blockchains. Other information you’ll find during an on-chain analysis include:
- Wallet data showing details of people’s wallet addresses, address balances, and other wallet-related activities.
The data provided can help analysts identify crypto whales or large market movers, especially institutional investors or influential people, and their actions.
- Block data highlighting every transaction block detail, including block size, miner or validator rewards, and the total number of transactions in each block.
- Smart contract data of proof-of-stake blockchains that support such contracts. The details include the blockchain’s interactions with decentralized applications (dApps), decentralized finance (DeFi) platforms, and protocols.
All the data combine to make on-chain data. So, unlike off-chain data, including technical and fundamental analyses, market sentiment, and news, on-chain data is traceable, verifiable, and accurate.
Why is On-Chain Analysis Important to Traders?
Crypto traders, especially beginners, should consider adopting on-chain analysis into their trading strategies for the following reasons:
Deeper Market Insights
With on-chain data, you can take your market research beyond basic price charts or fundamental analysis. You’ll identify how transparent a blockchain is by its support for independent transaction verification. You’ll also gather better insights about the market sentiment through data like wallet movement and transaction volumes.
Furthermore, you’ll identify short-term and long-term trends from historical on-chain data and detect unusual activities like sharp changes in transaction volumes that may suggest market manipulation.
Altogether, these insights help you make data-backed predictions that you can leverage to determine the best market entry and exit points and make smart investment choices.
Whale Watching
As stated earlier, on-chain data exposes you to significant market movements and wallet activities on a particular blockchain network. Monitoring these large wallets helps you understand the behaviors of crypto whales and other major market influencers and how their actions can affect the overall crypto market.
For instance, if a blockchain’s on-chain data shows that whales are buying a coin in large quantities, it could be a sign of an upcoming bull market, which will result in a sharp price increase during that period. You can quickly invest in it based on this prediction and profit from the ongoing whale activity.
Similarly, when whales dump an asset in large quantities, it shows they are exiting the market and a significant price fall is imminent. With that information, you can quickly sell off the affected crypto holding to avoid substantial loss.
Better Risk Management
The crypto market is risky, but you can manage these risks with adequate on-chain data. Before investing in a particular cryptocurrency, analyzing its on-chain data can help you identify potential risks and red flags.
These include low volatility, network instability, unimpressive user activity, potential network exploits or security breaches, and overall network health. With the obtained information, you can make strategic decisions, such as taking out your investments from unstable or insecure networks, adjusting your risk tolerance, and making other informed investment decisions.
Improved Trading Decisions
On-chain analysis helps you identify early warning signs for potential price movements. With such information, you can stay ahead of the market and adjust your trading strategies before an impending activity occurs and other traders catch up.
For instance, when you observe a sharp change in exchange inflow, there’s likely a looming selling pressure among investors. This can quickly prompt you to adjust your portfolio in line with the prevailing market conditions.
Reduced Information Overload
When working with technical analysis and fundamental data, you’re grappled with lots of information. From price charts to candlesticks, expert predictions, news, and opinions, there is so much to unpack.
However, with on-chain analysis, you can filter the noise and focus on actual data instead of numerous sentiments and predictions from different quarters.
For instance, you can determine the average investor behavior from on-chain data. This can help draw your own data-backed conclusions on the current market sentiment and possible price movements instead of relying on only external information.
What Are the Key On-Chain Metrics to Lookout For?
Like technical and fundamental analysis, on-chain analysis combines different data that can be overwhelming. As a beginner, you don’t necessarily need to do too much when studying blockchain data. Here are the most crucial metrics to look for when analyzing blockchains:
The active wallet addresses
By identifying the number of unique wallet addresses transacting on a blockchain over a certain period, you can gauge the level of user activity on the network to make smart trading and investment decisions.
The transaction volume
A network’s transaction volume gives insights into how much cryptocurrency moves through it over a specific period. A high transaction volume typically indicates strong network usage, while a low volume suggests limited user activity.
The network fees
Analyzing the transaction or gas fees on a particular blockchain network can help you determine when there’s network congestion and the current trading behaviors. With this information, you can decide your next line of action in the crypto market.
Beginner-Friendly Tools for On-Chain Analysis
Many on-chain analysis tools are on the market, each with unique features catering to the needs of various users. Ready to start your on-chain analysis journey? We list a few useful tools to consider below:
Glassnode
Glassnode is an on-chain market intelligence tool with a user-friendly interface that makes analysis seamless. The platform offers contextualized market analysis for both retail and institutional investors, helping users to anticipate market trends with thousands of metrics and indicators.
Its essential features include precise wallet tracking, full exchange data coverage, intuitive charting tools, and on-chain metric depth for assets like Bitcoin Ethereum, stablecoins, and cryptocurrencies in the DeFi and derivatives markets.
CoinMarketCap
Though it’s not precisely an on-chain analytical tool, CoinMarketCap is efficient for understanding basic blockchain data. The platform provides information, such as a coin’s market capitalization value, price charts and histories, and other market information.
It is also free to use and user-friendly, making it better suited to beginners looking to understand blockchain data.
Dune
Dune is a community-powered crypto analytics platform with over 750,000 insights and community dashboards. Unlike other on-chain data tools, Dune leverages data from its community members to offer its users comprehensive market analysis.
With access to data across 30+ blockchains, you can track essential metrics for cryptocurrencies, DeFi projects, and non-fungible tokens (NFTs).
Tips For On-Chain Analysis
Here are some pro tips to guide your on-chain analysis journey:
- Gather data and insights from only trusted sources for better accuracy
- Don’t rely on on-chain data alone. Stay informed and keep up with market trends to make adjustments when necessary
- Stick to user-friendly platforms for your analysis
- Don’t make decisions in a hurry or based on one transaction. Instead, let the market play out slightly to avoid getting overwhelmed.
- Talk to experienced traders and investors in your crypto community if you need help.
Limitations and Challenges
While on-chain analysis is efficient in gathering market insights and making smart trading and investment choices, it has its limitations.
First, the crypto market is vast, and one metric cannot fully capture the details. For instance, transactions on centralized exchanges (CEXs) mostly happen off-chain. That means the available data may ultimately not tell the whole story.
Moreover, blockchain technology is anonymous, making it challenging to identify the people behind wallet addresses, especially crypto whales. This makes it complicated when tracking high-volume traders, as you’re not completely certain they are not market manipulators.
Finally, note that blockchain data isn’t conclusive and may not necessarily influence market eventualities. Consider on-chain analysis a predictive tool that needs to be combined with other analyses for a more comprehensive outcome.
Conclusion
On-chain analysis is an efficient tool for understanding market dynamics and making smart decisions to improve your opportunities in the crypto market. It gives you various data and predictions that can guide you.
However, never mistake an on-chain analysis tool for a market determiner. While these tools can help make predictions, they don’t influence investor sentiment or trading decisions. Essentially, combine on-chain analysis with other forms of crypto market research for better results.
Before investing in any crypto project, a quick on-chain analysis can help you determine its demand and supply, market trends and find potential opportunities. For instance, as the $ZYPTO Token continues to attract investors, analyzing its on-chain data can help make informed decisions when trading the token on various cryptocurrency exchanges.
You can also check out the Zypto website for our crypto services for business, including crypto wallet solutions, payment gateways, and project development.
As a crypto trader, what are your thoughts on on-chain analysis? Do you believe it’s more efficient than technical and fundamental analyses? Let’s have your thoughts below.
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