Table of Contents
1 What is On-Chain Analysis?
On-chain analysis examines blockchain data to gain insights into its activity, overall health, and potential of a cryptocurrency project.
By analyzing on-chain data, we can gain insights into market sentiments and potential future price movements.
On-chain data refers to the information recorded on a blockchain network, which includes details about transactions, addresses, and other activities.
This data is publicly available and verified by network participants, making it transparent and secure.
The key advantage of on-chain data is its trustworthiness, as it is part of the public ledger and cannot be manipulated.
For example, you can identify the flow of funds, monitor the activities of large players, and track the movement of digital assets.
This helps you gauge potential price movements, enhancing your ability to anticipate and react to the coming market trends.
However, on-chain analysis can also have limitations.
The volume of blockchain transactions and the complexity of the data can be overwhelming, requiring analytical tools and skills for proper interpretation.
Additionally, on-chain data may not always provide real-time information, as blockchain transactions can take time to confirm.
Don’t worry about the limitations, this article is an introductory guide to on-chain analysis for beginners.
It lists the key indicators you need to use, helping you quickly grasp the key points.
2 How to Analyze On-Chain Data?
Here are the key steps:
โ1. Identify the Project and Relevant Blockchain
Determine which blockchain project you want to analyze.
Different blockchains have different metrics and data availability.
For example, the Proof-of-Work (PoW) blockchain has special metrics that differ from those of the Proof-of-Stake (PoS) blockchain.
We’ll go through these metrics later in this article.
โ2. Choose the Right Tools
Utilize appropriate on-chain data analysis tools and platforms.
Popular options include Glassnode, CryptoQuant, and Nansen.
These tools provide user-friendly interfaces, data visualization, and advanced analytics capabilities.
We’ll mention them in the later section.
โ3. Analyze Relevant Data
Collect the necessary on-chain data metrics for your analysis.
This may include:
โช๏ธ Network Activity and Usage
Active addresses, transaction volume, and network fees
โช๏ธ Holder Behavior and Supply Dynamics
Supply distribution, realized value, spent output profit ratio (SOPR)
โช๏ธ Miner Activity and Rewards
Miner outflows, miner revenue, hash rate
โช๏ธ Network Health and Security
Network congestion, network stability
โช๏ธ Economic Indicators and Valuation
Market capitalization, on-chain volume to off-chain volume ratio, network fees
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โ4. Make Decisions
Use these data to predict potential price movements and assess the project’s long-term viability.
Consider the project’s fundamentals, technical indicators, and the overall market sentiment alongside on-chain data analysis.
โAdditional Tips
โช๏ธ Consider Multiple Metrics
Analyze a combination of metrics to get a comprehensive picture of the blockchain’s health.
Relying on a single metric can be misleading.
โช๏ธ Compared to Historical Data
Benchmark current metrics against historical data to identify trends and changes over time.
โช๏ธ Consider External Factors
Don’t isolate on-chain data. Incorporate external factors like news, market sentiment, and regulatory developments.
โช๏ธ Continuous Monitoring
Monitor it regularly to stay updated on project developments.
โช๏ธ Combine other Analytical Methods
You can use it in conjunction with fundamental analysis and technical analysis to make more thorough decisions.
3 Key Metrics of On-Chain Analysis
Let’s explore the key metrics and indicators commonly used in on-chain analysis.
โActive Addresses
Active addresses refer to the unique wallet addresses that have interacted with a blockchain network within a specific period, typically a day or a week.
They are counted by tracking the number of unique addresses that have either sent or received cryptocurrency within the specified time frame, typically 24 hours or 7 days.
This metric excludes addresses that have only interacted with smart contracts or decentralized applications (DApps) as these actions don’t directly involve cryptocurrency transfers.
It let you evaluate user engagement and adoption within the crypto ecosystem.
โช๏ธ Rising trend in active addresses
It suggests increasing network usage and user engagement, which can be interpreted as a positive sign for the network’s growth and potential.
A sudden spike in active addresses may not necessarily indicate a surge in user adoption but could be attributed to specific events or market fluctuations.
โช๏ธ Declining trend in active addresses
It may indicate waning interest or a lack of usage.
โช๏ธ Limitations of Active Addresses
Exchanges and Mining Activity
Active addresses can include transactions from cryptocurrency exchanges and miners, which may not directly reflect the activity of individual users.
Wallet Address Reuse
Some users may use multiple wallet addresses, potentially inflating the number of active addresses.
Network Growth
As a network grows, the number of active addresses is expected to increase naturally, making it difficult to isolate genuine user activity.
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โTransaction Volume
Transaction volume refers to the total amount of cryptocurrency transferred on a blockchain over a specified period, typically 24 hours or 7 days.
It is a key metric used to assess the level of activity and usage of a blockchain network.
โช๏ธ What Does Transaction Volume Mean?
Transaction volume provides insights into the overall usage of a cryptocurrency and can indicate various aspects of its functionality.
High transaction volume generally suggests that the network is being used actively and that there is a demand for its services.
This can be a positive sign for the network’s health and potential future growth.
Analyzing transaction volume alongside price movements or the flow ratio (the ratio of exchange inflows to outflows) can provide a clearer picture of market dynamics.
Payment Activity
High transaction volume suggests that the cryptocurrency is being used for payments and transactions, reflecting its adoption as a medium of exchange.
Capital Flows
Transaction volume can indicate the movement of capital into or out of the cryptocurrency, potentially signaling investor interest or disinterest.
Network Congestion
High transaction volume can lead to network congestion, resulting in slower transaction processing and higher transaction fees.
โช๏ธ Limitations of Transaction Volume
While transaction volume provides valuable insights into network activity, it is important to consider certain limitations when interpreting this metric.
Transaction Size
Transaction volume is measured in terms of total value, not the number of transactions.
A few large transactions can significantly impact the overall volume without reflecting broader usage.
Wash Trading
Wash trading, where individuals trade with themselves to create false transaction volume, can artificially inflate the metric.
Network Growth
As a network grows, the total value of transactions is expected to increase naturally, making it difficult to isolate genuine economic activity.
โExchange Inflows
Exchange inflows refer to the total amount of cryptocurrency transferred from external wallets to cryptocurrency exchanges.
โช๏ธ High Exchange Inflows May Indicate
Increased buying pressure
If a significant amount of cryptocurrency is being transferred into exchanges, it suggests that investors are looking to buy and potentially drive up the price.
Profit-taking
When cryptocurrency prices are rising, holders may transfer their holdings to exchanges to sell and take profits.
This can also lead to increased exchange inflows.
Rebalancing portfolios
Investors may rebalance their cryptocurrency portfolios by transferring funds from other wallets to exchanges.
This can occur for various reasons, such as adjusting risk exposure or diversifying holdings.
โช๏ธ Low Exchange Inflows May Indicate
Decreased buying pressure
If investors are not transferring cryptocurrency into exchanges, it suggests that there is less interest in buying, potentially leading to price declines.
Holding sentiment
Holders may be holding onto their cryptocurrency rather than selling, indicating confidence in its future value.
This can lead to lower exchange inflows.
Market uncertainty
During periods of uncertainty or market volatility, investors may be hesitant to transfer funds to exchanges and sell their holdings.
This can also contribute to lower exchange inflows.
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โExchange Outflows
Exchange outflows refer to the total amount of cryptocurrency that moves out of exchanges and into personal wallets or other storage options.
โช๏ธ High Exchange Outflows May Indicate
Increased selling pressure
If a significant amount of cryptocurrency is being transferred out of exchanges, it suggests that investors are looking to sell and potentially drive down the price.
Taking profits
When cryptocurrency prices are falling, holders may transfer their holdings out of exchanges to secure their profits.
This can also lead to increased exchange outflows.
Moving funds to other wallets
Investors may transfer their cryptocurrency out of exchanges to store it in more secure wallets or to use it for other purposes, such as staking or participating in decentralized finance (DeFi) protocols.
โช๏ธ Low Exchange Outflows May Indicate
Decreased selling pressure
If investors are not transferring cryptocurrency out of exchanges, it suggests that there is less interest in selling, potentially leading to price stability or even increases.
Accumulation phase
During periods of price consolidation or dips, investors may be accumulating cryptocurrency by transferring it out of exchanges to store it in their own wallets.
Holding sentiment
Holders may be holding onto their cryptocurrency within exchanges, indicating confidence in its future value and potentially waiting for more favorable price movements before selling.
โSupply Distribution
Supply distribution refers to how a cryptocurrency’s supply is spread among different types of holders, such as individual investors, whales, exchanges, and mining pools.
This metric is important for assessing the level of decentralization and concentration of a cryptocurrency’s ownership.
โช๏ธ What Does Supply Distribution Mean?
Supply distribution provides insights into the ownership structure of a cryptocurrency and can have implications for its price volatility, liquidity, and long-term viability.
Highly concentrated supply
If a small number of addresses hold a large percentage of the total supply of a cryptocurrency, it suggests a higher level of centralization and potentially a higher risk of market manipulation.
More evenly distributed supply
It suggests a more decentralized ownership structure, potentially enhancing stability and resilience to price fluctuations, as it reduces the risk of manipulation and promotes a more equitable distribution of rewards.
โช๏ธ Identify Potential Trends
Supply distribution can also be used to identify potential trends or patterns that may impact market sentiments and price movements.
For instance, if a significant number of large holders start selling off their holdings, it could lead to increased selling pressure and a subsequent decline in prices.
Conversely, if smaller holders accumulate more of the supply, it may indicate growing confidence in the asset and potentially lead to price appreciation.
โช๏ธ Limitations of Supply Distribution
Inactivity of Addresses
Inactive addresses with significant token holdings can distort the perception of actual distribution.
Exchange Holdings
Cryptocurrency exchanges hold large amounts of tokens on behalf of their users, which may not accurately reflect individual ownership.
Dynamic Nature of Distribution
Token holdings can change rapidly due to trading activity, making it challenging to capture a precise representation of supply distribution at a specific point in time.
โช๏ธ Address Category
Supply distribution is typically analyzed by examining the percentage of the cryptocurrency’s supply held by each address category, such as:
Sharks
Addresses holding 1-10% of the total supply
Whales
Addresses holding 10-50% of the total supply
Dolphins
Addresses holding 0.1-1% of the total supply
Fish
Addresses holding 0.01-0.1% of the total supply
Shrimp
Addresses holding less than 0.01% of the total supply
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โTotal Value Locked (TVL)
Total Value Locked (TVL) is the amount of cryptocurrency or assets locked or staked in a particular protocol or decentralized application (DApp) on the blockchain.
Analyzing the TVL can help you understand the popularity and potential profitability of different DeFi projects.
TVL tracking tools typically provide customizable dashboards and smart alerts to help you stay updated on changes in TVL and make decisions.
Defillama is one of the best platforms for you to discover TVL of all protocols on various blockchains.
โช๏ธ What Does TVL Mean?
TVL is considered a key indicator of the overall health and growth of the DeFi ecosystem.
Rising TVL
It suggests that more users are locking in their assets to participate in DeFi protocols, which may indicate growing interest and adoption of DeFi applications.
Declining TVL
It could signal a loss of confidence or a shift in market sentiments, potentially leading to price declines.
A sudden spike in TVL may not necessarily indicate a surge in user activity or asset inflows but could be attributed to specific events or market fluctuations.
โช๏ธ How is TVL Caculated?
It is calculated by summing up the value of all tokens or assets that are deposited into DeFi protocols, such as lending pools, liquidity pools, and staking contracts.
This value is typically expressed in US dollars (USD) or the native cryptocurrency of the underlying blockchain
โช๏ธ Limitations of TVL
Unrealized Gains
TVL includes the value of all assets locked in DeFi protocols, regardless of whether they have been realized or not.
Unrealized gains can artificially inflate TVL during periods of bull markets.
Market Value Fluctuations
TVL is influenced by the market value of the underlying cryptocurrency assets, making it important to consider price movements when evaluating TVL trends.
Protocol Risk
TVL does not directly reflect the risk associated with specific DeFi protocols.
Some protocols may carry higher risks than others, and the value locked in these protocols may be more susceptible to losses.
Cross-Chain TVL
TVL is often measured for specific blockchains, but it is important to consider the cross-chain nature of DeFi.
Assets can be transferred between blockchains, and TVL on one chain may be influenced by activity on other chains.
Misleading Representations
TVL can be inflated by users depositing the same funds into multiple protocols, artificially boosting the overall value.
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โSupply in Profit or Loss
It reflects the overall profitability or loss-making status of cryptocurrency holders.
โช๏ธ Supply in Profit
The “Supply in Profit” metric represents the percentage of the cryptocurrency’s total supply for which the current price is higher than the last price at which it was moved on-chain.
This indicates that holders of these units have unrealized profits, meaning they would make a profit if they sold their cryptocurrency at the current price.
A high “Supply in Profit”
It suggests that a majority of holders are confident in the cryptocurrency’s future value and are willing to hold onto their holdings, even if they are not actively using them.
This can be a positive sign for the cryptocurrency’s price.
During market downturns, supply in loss becomes more prominent as the value of coins declines.
โช๏ธ Supply in Loss
The “Supply in Loss” metric represents the percentage of the cryptocurrency’s total supply for which the current price is lower than the last price at which it was moved on-chain.
This indicates that holders of these units have unrealized losses, meaning they would make a loss if they sold their cryptocurrency at the current price.
During bull markets or periods of price appreciation, supply in profit tends to increase as the value of coins rises.
A high “Supply in Loss”
It suggests that a majority of holders are experiencing unrealized losses and may be more likely to sell their holdings to recoup their losses.
This can put downward pressure on the cryptocurrency’s price.
It is important to note that “Supply in Profit” and “Supply in Loss” are lagging indicators, meaning they reflect past profitability rather than future profitability.
Additionally, these metrics do not take into account fees and taxes, which can impact the actual profit or loss realized by holders.
4 6 Metrics for Predicting Price Action
Predicting price action in the cryptocurrency market can be a daunting task, but there are several metrics that can be used to gain insight into potential price movements.
Let’s explore these treasure metrics!
โStock-to-Flow Ratio (S2F)
The S2F ratio is designed to assess the scarcity of a commodity or asset by comparing its existing stock (total supply) to its annual flow (new production or issuance).
It is primarily used to evaluate the potential value of precious metals like gold and has been applied to Bitcoin as a measure of its scarcity and potential long-term price appreciation.
โช๏ธ What Does S2F Ratio Mean?
The S2F Ratio is based on the principle of scarcity driving value.
The more scarce an asset is, the more valuable it is likely to be.
A higher S2F Ratio suggests that an asset is more scarce and may have greater potential for value appreciation.
โช๏ธ How is S2F Ratio Calculated?
The S2F Ratio is calculated by dividing the current stock of an asset by its annual flow.
For instance, if the current stock of Bitcoin is 19 million BTC and its annual new issuance is 300,000 BTC, the S2F Ratio would be 63.33.
โช๏ธ Limitations of S2F Ratio
Linear Relationship Assumption:
The S2F Ratio assumes a linear relationship between scarcity and value, which may not always hold true in real markets.
Market Dynamics and Speculation
Market sentiment, speculation, and other factors can significantly impact asset prices, regardless of their scarcity.
Applicable to Specific Assets
The S2F Ratio is more applicable to assets with limited or predictable new supply, such as precious metals or Bitcoin.
For assets with variable or unpredictable supply, it may be less relevant.
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โStablecoin Supply Ratio (SSR)
The SSR measures the ratio of stablecoin supply to the total cryptocurrency market capitalization.
It is used to assess the overall stability and demand for stablecoins within the cryptocurrency ecosystem.
The SSR is most commonly used in conjunction with BTC due to its dominance in the cryptocurrency market.
โช๏ธ What Does SSR Mean?
Higher SSR
It may indicate growing demand for stablecoins as a store of value or medium of exchange, but it does not guarantee continued growth or stability.
โช๏ธ How is SSR Caculated?
SSR = Market Cap (of a cryptocurrency) / Market Cap of Stablecoins
or instance, if the total supply of stablecoins is $100 billion and the total cryptocurrency market capitalization is $2 trillion, the SSR would be 0.05.
Limitations of Stablecoin Supply Ratio
Limited Scope
The SSR focuses solely on stablecoin supply and does not account for other aspects of stablecoin usage or demand.
Specific Stablecoins
The SSR provides a broad view of stablecoin supply across various stablecoins, but it may not accurately reflect the demand for specific stablecoins.
Market Dynamics
Market sentiment, regulatory factors, and other factors can significantly impact stablecoin demand and the SSR.
โMarket Value to Realized Value (MVRV)
Market value to realized value (MVRV) assesses the relative overvaluation or undervaluation of a cryptocurrency’s price.
It is widely used to evaluate the potential risk and reward associated with holding an asset.
โช๏ธ How is MVRV Calculated?
MVRV = Market Price / Realized Value
For instance, if the current market price of Bitcoin is $20,000 and its realized value is $10,000, the MVRV would be 2.
This means that the current market price is twice the average price at which Bitcoin was last purchased.
โช๏ธ What Does MVRV Mean?
The significance of MVRV lies in its ability to indicate potential market tops or bottoms.
Overvalued Zone (MVRV > 3.5)
A high MVRV value suggests that the cryptocurrency may be overvalued and could be due for a correction.
It suggests that the average investor is in profit, which may signal an overheated market and a potential top.
Undervalued Zone (MVRV < 1)
A low MVRV value suggests that the cryptocurrency may be undervalued and could be due for a rebound.
โช๏ธ Limitations of MVRV
Lagging Indicator
MVRV is a lagging indicator, meaning it reflects past buying and selling behavior.
It may not accurately capture current market conditions or future price movements.
Average Acquisition Price
The average acquisition price used in the MVRV Ratio may not accurately reflect the acquisition price for all holders, particularly for assets with a long history.
Overall Market Conditions
Market sentiment, regulatory factors, and other factors can impact cryptocurrency prices, regardless of MVRV.
Different Time Frames
MVRV can be calculated using different time frames, such as 30-day or 180-day RV, which can influence the interpretation.
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โNetwork Value to Transaction (NVT)
The NVT ratio compares the market capitalization of a cryptocurrency to its transaction volume over a specific period, typically 24 hours or 30 days.
It is used to assess the overall sentiment and activity level on a cryptocurrency network.
โช๏ธ How is NVT Calculated?
NVT = Market Capitalization / Transaction Volume
For instance, if the current market capitalization of Bitcoin is $200 billion and its 24-hour transaction volume is $10 billion, the NVT ratio would be 20.
โช๏ธ What Does NVT Ratio Mean?
The NVT ratio is based on the idea that a higher market capitalization relative to transaction volume indicates a higher valuation of the network.
High NVT
A high NVT suggests that the network is relatively overvalued compared to its transaction volume.
It may indicate potential for a correction, but it does not guarantee a decline in price.
Low NVT
a low NVT may suggest potential for a rebound, but it does not guarantee an increase in price.
It suggests that the network is relatively undervalued.
Rising NVT Ratio
It suggests that the network is becoming more valuable relative to its activity, potentially indicating growing interest and adoption.
Declining NVT Ratio
It may indicate waning interest or a lack of economic activity.
Constant NVT Ratio
This means a sideways trend, it suggests a balanced market sentiment.
โช๏ธ Limitations of NVT Ratio
Sensitivity to Market Capitalization
NVT is sensitive to changes in market capitalization, which can be influenced by factors such as market sentiment and speculation.
Transaction Volume Dynamics
Transaction volume can be affected by various factors, such as exchange activity, wash trading, and overall network usage.
Network Growth
As a network grows, transaction volume is expected to increase naturally, making it difficult to isolate genuine economic activity.
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โSpent Output Profit Ratio (SOPR)
The SOPR assesses the overall profitability of cryptocurrency transactions.
โช๏ธ How is SOPR Calculated?
SOPR = Realized Value / Creation Value
The realized value
It is the price at which the outputs were last sold.
The creation value
It is the price at which the outputs were first created or purchased.
โช๏ธ What Does SOPR Mean?
SOPR provides insights into the overall profitability of cryptocurrency transactions, which can be used to gauge market sentiment and potential price movements.
SOPR > 1
It suggests that holders are confident in the future value of the cryptocurrency and are willing to sell at a profit.
This can be a positive sign for the cryptocurrency’s price.
SOPR < 1
It suggests that holders are losing faith in the cryptocurrency and are willing to sell at a loss.
This can be a negative sign for the cryptocurrency’s price.
Rising SOPR
It suggests that more transactions are profitable, indicating growing confidence and optimism.
A sustained rise in SOPR > 1 may indicate a bullish trend.
Declining SOPR
It suggests that more transactions are unprofitable, indicating potential selling pressure and bearish sentiment.
A sustained declining in SOPR < 1 may indicate a bullish trend.
โช๏ธ Limitations of SOPR
Lagging Indicator
SOPR is a lagging indicator, meaning it reflects past selling behavior.
It may not accurately capture current market conditions or future price movements.
Sensitivity to Market Fluctuations
SOPR is sensitive to market fluctuations, as both realized value and creation value are influenced by recent price movements.
Timeframe Considerations
SOPR can vary depending on the timeframe analyzed.
Short-term SOPR may reflect recent price movements, while long-term SOPR may provide more insights into overall market trends.
Market Dynamics and Speculation
Market sentiment, speculation, and other factors can significantly impact cryptocurrency prices and transaction behavior, influencing SOPR readings.
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โExchange Reserves
Exchange reserves refer to the total amount of an asset held by centralized exchanges.
It is a key metric used to assess the potential supply available for trading and the overall liquidity of the cryptocurrency market.
โช๏ธ What Does Exchange Reserves Mean?
It provides insights into the potential selling pressure and liquidity of a cryptocurrency.
Increase in Exchange Reserves
It suggests that more investors are depositing their assets on exchanges, potentially indicating a higher likelihood of selling pressure.
If exchange reserves are increasing while demand weakens, it may suggest an oversupply and potential downward price pressure.
However, a sudden increase in exchange reserves may not necessarily indicate a bearish outlook, especially for periods of increased trading activity or market volatility.
Decrease in Exchange Reserves
It suggests that more investors are withdrawing their assets from exchanges, potentially reducing the immediate selling pressure in the market.
If exchange reserves are declining while demand remains strong, it may indicate a potential supply shortage and potential price appreciation.
โช๏ธ Limitations of Exchange Reserves
Limited Scope
Exchange reserves only reflect the amount of a cryptocurrency held in the directly viewable wallets of tracked exchanges.
It does not account for coins held in other wallets or in custodial accounts.
Varying Exchange Reporting Practices
Different exchanges may have different reporting practices for cryptocurrency reserves, potentially affecting the accuracy of aggregated data.
Wash Trading
Manipulative trading practices, such as wash trading, can artificially inflate exchange reserves.
โช๏ธ Factors Influencing Exchange Reserves
User Deposits and Withdrawals
The movement of funds into and out of cryptocurrency exchanges directly impacts exchange reserves.
Trading Activity
Active trading on exchanges can lead to fluctuations in exchange reserves as traders move funds between exchanges and wallets.
Market Sentiment and Speculation
Market sentiment and speculation can drive investors to deposit or withdraw funds from exchanges, affecting exchange reserves.
Exchange-Specific Events: Changes in exchange policies, security incidents, or other exchange-specific events can also impact exchange reserves.
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5 4 Metrics for Assessing PoW Networks
A famous example of a Proof-of-Work (PoW) network is Bitcoin.
โHash Rate
It refers to the computational power of a blockchain network.
It is measured by the number of hashes (or guesses) that miners can generate per second to solve complex mathematical problems and validate transactions.
It is often used to assess the network’s resistance to 51% attacks, where a single entity or group controls a majority of the hashing power and could potentially tamper with the blockchain.
A higher hash rate indicates a more secure and robust network, as it makes it more difficult to attack or manipulate the blockchain.
Here are some of the factors that can affect a blockchain network’s hash rate:
โช๏ธ Number of Miners
The number of miners participating in the network is one of the primary factors that determines the hash rate.
More miners contribute more computational power to the network, leading to a higher hash rate.
โช๏ธ Mining Difficulty
The mining difficulty is a measure of how hard it is to solve the cryptographic puzzle required to validate a block and earn a reward.
As the mining difficulty increases, miners need more powerful computers to solve the puzzle, which can lead to a temporary decrease in the hash rate.
โช๏ธ Mining Hardware
The type of hardware used by miners can also affect the hash rate.
More efficient mining hardware can solve cryptographic puzzles more quickly, contributing to a higher hash rate.
โช๏ธ Network Congestion
During periods of network congestion, when the network is processing a large volume of transactions, the hash rate may temporarily decrease due to the increased workload.
โMiner Flows
Miner flows, also known as miner outflows or miner selling pressure.
It refers to the net movement of cryptocurrency from miners’ wallets to other addresses.
In the Proof-of-Work (PoW) mechanism, miners play a crucial role in maintaining the security and integrity of blockchain networks.
They are responsible for validating transactions and adding them to the blockchain.
They perform complex mathematical computations to solve cryptographic puzzles, ensuring the integrity and security of the network.
In return for their computational work, miners are rewarded with newly minted cryptocurrency and transaction fees.
Miners often sell a portion of their newly minted coins to cover operational expenses or take profits.
Large outflows of newly minted coins from miners to exchanges suggest that miners are actively selling their rewards, potentially indicating a bearish outlook.
Reduced outflows or accumulation of coins by miners may suggest a bullish sentiment, as miners hold onto their rewards in anticipation of higher prices.
This metric is used to track the overall sentiment among miners regarding their cryptocurrency holdings.
โช๏ธ Positive Miner Flows
It indicates that miners are selling more cryptocurrency than they are mining.
A sustained period of positive miner flows could signal that miners are losing confidence in the cryptocurrency’s future prospects, leading to potential price declines.
โช๏ธ Negative Miner Flows
It indicates that miners are buying more cryptocurrency than they are mining.
Conversely, consistent negative miner flows could suggest that miners are accumulating cryptocurrency, indicating a positive outlook and potentially driving price increases.
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โMiner Supply Ratio
The ratio is the proportion of the total cryptocurrency supply that is held by miners.
This metric can be used to assess the level of concentration of power among miners.
It shows the percentage of cryptocurrency held by miners in comparison to the entire cryptocurrency supply in circulation.
A higher ratio often indicates that the network is more centralized, which could raise security and governance issues.
Miner Supply Ratio = Miner Reserve / Total Supply.
โช๏ธ Miner Reserve
The miner reserve is the total amount of cryptocurrency held by miners.
This includes cryptocurrency mined by miners but not distributed to users or exchanges, as well as cryptocurrency that miners have acquired through other means, such as buying it on the open market.
โช๏ธ Total Supply
The total supply is the total amount of cryptocurrency in circulation.
This includes cryptocurrency held by miners, users, and exchanges.
โช๏ธ High Miner Supply Ratio
It can indicate several things:
High concentration of power among miners
If miners hold a large proportion of the total cryptocurrency supply, it means that they have a lot of control over the network.
This could lead to problems with security and governance, as miners could use their power to manipulate the network or make decisions that are not in the best interests of all users.
Decreasing network decentralization
As the Miner Supply Ratio increases, it means that the network is becoming more centralized.
This is because a smaller number of miners are controlling a larger proportion of the cryptocurrency supply.
Potential for malicious behavior
If miners hold a large proportion of the cryptocurrency supply, they could use their power to engage in malicious behavior, such as attacking the network or manipulating the price of the cryptocurrency.
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โMiner Revenue
Miner revenue refers to the total amount of cryptocurrency that miners receive as compensation for their work in validating transactions and securing the blockchain network.
This revenue is typically composed of two components:
โช๏ธ Block Rewards
Block rewards are the newly minted cryptocurrency that is issued to the miner who successfully solves the cryptographic puzzle and validates a new block.
โช๏ธ Transaction Fees
Transaction fees are the fees that users pay when they send cryptocurrency transactions across the network.
These fees are collected by miners and added to their block rewards.
A high miner revenue suggests that the network is generating significant economic activity and that miners are being adequately compensated for their work.
This can be a positive sign for the network’s long-term viability.
โช๏ธ Factors Affect Miner Revenue
Cryptocurrency price
The price of the cryptocurrency being mined is the primary determinant of miner revenue.
When the cryptocurrency price is high, miners earn more in block rewards and transaction fees.
Network activity
It is measured by transaction volume and active addresses.
More network activity leads to higher transaction fees, which in turn increases miner revenue.
Hash rate
It is a measure of its computational power.
A higher hash rate can lead to increased competition among miners, which can put downward pressure on miner fees and revenue.
Mining difficulty
It is a measure of how difficult it is to solve the cryptographic puzzle required to validate a block.
As the mining difficulty increases, miners need to invest more resources and energy to mine, which can reduce their profitability.
6 3 Metrics for Assessing PoS Networks
A famous example of a Proof-of-Stake (PoS) network is Ethereum.
โStaking Ratio
It refers to the percentage of a cryptocurrency’s total supply that is currently staked or locked up in a staking protocol.
Staking is a process in which cryptocurrency holders lock up their tokens to participate in the validation of transactions and secure the network.
In return for staking their tokens, holders earn rewards in the form of newly minted cryptocurrency.
A high staking ratio suggests that a large portion of the cryptocurrency’s supply is being actively used to secure the network.
This can be a positive sign for the network’s health and long-term viability, as it indicates that holders have confidence in the project’s future and are willing to lock up their tokens to support it.
โช๏ธ Factors Affect Staking Ratio
Network security
A high staking ratio can contribute to a more secure network by making it more difficult for attackers to gain control of the network.
Staking rewards
Higher staking rewards can incentivize more holders to stake their tokens.
Network adoption
As a cryptocurrency network grows and adoption increases, the staking ratio may also increase due to more holders participating in the network and staking their tokens.
Market sentiment
During periods of bullish sentiment, holders may be more inclined to stake their tokens.
During periods of bearish sentiment, holders may be more likely to sell their tokens or unstack them.
Lock-up periods
Shorter lock-up periods may attract more stakers, while longer lock-up periods may provide more stability to the network.
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โValidator Count and Distribution
They refer to the number of validators participating in the consensus mechanism of a Proof-of-Stake (PoS) blockchain network and their geographical distribution.
Validators are responsible for validating transactions, securing the network, and participating in the block production process.
A high validator count and a geographically diverse distribution are generally considered to be positive signs for a PoS network, indicating a strong and resilient infrastructure.
This suggests that the network is decentralized, has a strong community of active participants, and is less susceptible to manipulation or control by a small group of individuals.
โช๏ธ Validator Count
A high validator count indicates that the network is not overly reliant on a small group of individuals or entities for its security.
This makes it more difficult for attackers to gain control of the network and manipulate transactions.
โช๏ธ Validator Distribution
A geographically diverse validator distribution further enhances the network’s resilience against malicious attacks.
If validators are located in different parts of the world, it becomes more challenging for attackers to target them simultaneously and disrupt the network’s operation.
โช๏ธ Factors Affect Validator Count & Distribution
Network incentives
The rewards and incentives offered to validators can significantly impact the number of participants and their willingness to maintain the network.
Higher staking rewards and lower operating costs can attract more validators and encourage them to participate actively.
Network accessibility
A user-friendly and accessible platform for validator participation can attract a broader range of individuals and organizations, fostering a more decentralized network.
Geographical regulations
Clear and supportive regulations can encourage participation from validators worldwide, while restrictive policies may limit validator diversity.
Community engagement
Active community involvement, educational resources, and strong governance mechanisms can attract and retain validators from diverse backgrounds.
โValidator Churn
It refers to the rate at which validators exit and enter the consensus mechanism of a proof-of-stake (PoS) blockchain network.
It is a measure of the network’s stability and resilience, as a high churn rate can indicate potential security concerns or a lack of confidence in the network’s long-term viability.
A low validator churn rate suggests that validators are committed to maintaining the network and are not constantly entering or exiting the system.
This can contribute to a more stable and secure network, as it reduces the risk of malicious attacks or disruptions caused by validators leaving the system unexpectedly.
โช๏ธ Factors Affect Validator Churn
Network incentives
The rewards and incentives offered to validators can significantly impact their willingness to remain active participants in the network.
Lower staking rewards or higher operating costs can discourage validators from continuing to maintain their nodes and validate transactions.
Network performance
Network congestion, frequent downtime, or technical issues can lead to frustration among validators, prompting them to exit the system.
Community governance
A well-functioning governance system that addresses validator concerns and fosters consensus among participants can contribute to a lower churn rate.
Regulatory uncertainties
Evolving regulatory frameworks and uncertainties surrounding cryptocurrency usage in different regions can affect validator churn.
Fear of legal repercussions or unclear regulatory guidelines may discourage validators from participating in the network.
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7 5 Best On-Chain Analysis Tools/Platforms
โGlassnode
Glassnode is a leading on-chain platform that provides insights into the health and activity of blockchain networks.
It offers a wide range of metrics and visualizations, as well as historical data and real-time updates.
Glassnode is used by a variety of institutions, including professional investors, hedge funds, and cryptocurrency exchanges.
โช๏ธ Features
1. Comprehensive Data Coverage
- A wide range of on-chain data for Bitcoin and Ethereum, covering network activity, miner behavior, holder distribution, and market sentiment
2. Advanced Metrics and Visualizations
- Including charts, graphs, and interactive data tables
3. Historical Data and Real-time Updates
4. Custom Alerts and Notifications
- To receive updates on specific metrics or market events
5. Miner behavior metrics
- Get a comprehensive view of the health of the PoW blockchain, such as the hash rate and the average block size
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โNansen
Nansen specializes in identifying smart money and whale movements in the cryptocurrency market.
โช๏ธ Features
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- Track the activities of large cryptocurrency holders, including their wallets, transactions, and token holdings
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โDune Analytics
Dune Analytics is a SQL-based on-chain analysis platform that allows you to create custom queries and visualizations of blockchain data.
It is designed for analysts and data scientists, offering flexibility and power to analyze complex data sets.
โช๏ธ Features
1. SQL-based platform
2. Customizable queries
- Create custom SQL queries to extract specific data points or perform complex analysis on on-chain data
3. Visualizations
- Create charts, graphs, and dashboards that effectively convey insights from on-chain data
4. Community-driven
- A large community of users who share pre-built queries, visualizations, and insights
5. Data export and integration
- Export data and integrate it with other tools and platforms
โช๏ธ Pricing
Free Plan
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- Collaborate with other Dune users
Plus: $249/M
- All free plan features
- 25,000 credits
- 250 CSV exports/M
Premium: $849/M
- All plus plan features
- 100,000 credits
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โCryptoQuant
CryptoQuant offers a wide range of metrics and visualizations that help you understand the underlying health and activity of blockchain networks, particularly Bitcoin and Ethereum.
โช๏ธ Features
1. Real-time data
- Real-time data for Bitcoin and Ethereum
2. Advanced charting
- Visualize and analyze on-chain data in a variety of ways
3. Institutional-grade insights
- Such as market sentiment analysis and advanced charting options
4. API access
- Integrate on-chain data into your applications and research
5. Educational resources
- Grow with advance knowledge about on-chain analysis and market sentiment
โช๏ธ Pricing
Basic: Free
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- Up to 3 years of historical data
- Up to 1 block resolution
Advanced: $29/M
- All the features of the Basic plan
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- Up-to-date on-chain network and market data
Professional: $99/M
- Ideal for full-time traders and industry professionals
- All the features of the Advanced plan
- High-resolution and up-to-date on-chain network and market data
Premium: $799/M
- Designed for professional traders and small/early-stage institutions
- All the features of the Professional plan
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All plans include access to
- Receive expert insights from analysts with weekly Bitcoin commentary
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โSantiment
Santiment provides insights into the cryptocurrency market by analyzing blockchain data, social media mentions, and other indicators.
It is used by a wide range of users, from individual investors and traders to professional institutions and research firms.
โช๏ธ Key Features
1. On-chain data analysis
- A comprehensive suite of on-chain metrics that track the behavior of cryptocurrency holders, including network activity, miner behavior, and token distribution
2. Social sentiment analysis
Tracks social media mentions and sentiment to identify potential trading opportunities
3. Fundamental data and technical indicators
4. Sentiment monitoring and alerts
- Monitor social media sentiment and set up alerts to receive notifications when sentiment shifts occur
5. Community and educational resources
โช๏ธ Pricing
Sanbase: $44/M
- Personal watchlists
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SanAPI: $149/M
- TBs of processed on-chain, social, GitHub, and fundamental data
- Backtest strategies
- Build your own signals or develop trading bots
- Robust framework for 3rd-party integration
8 Pros of Using On-Chain Analysis
By analyzing data directly from the blockchain, traders can gain a deeper understanding of market trends, sentiments, and investment opportunities.
Here are the advantages of utilizing on-chain analysis:
โPredicting Trends
On-chain analysis allows you to assess transaction volume and activity, providing valuable information about the movement of digital assets.
By identifying patterns and trends in blockchain transactions, you can predict future price movements and market behavior.
โGauging Market Sentiment
The public ledger nature of blockchain networks enables the tracking of active addresses and supply distribution.
Monitoring chain metrics and indicators helps you gauge whether traders are accumulating or selling digital assets.
โIdentifying Investment Opportunities
On-chain analysis uncovers important data about wallet addresses, transaction history, and flow ratios.
By examining these metrics, you can identify potential accumulation or distribution behavior, and adjust your trading strategies accordingly.
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9 Limitations of Using On-Chain Analysis
โOverwhelming
One of the main drawbacks is the sheer amount of data that needs to be analyzed.
Public blockchains generate vast volumes of blockchain data, making it time-consuming and resource-intensive to process and extract relevant information.
โNo Guarantee for Price Movement
on-chain analysis tends to provide backward-looking metrics, as it offers insights into past market behavior.
However, it may not accurately predict future price movements or market trends.
โA Partial View of the Market
Furthermore, it’s important to note that on-chain analysis only provides a partial view of the market.
It doesn’t take into account external factors, such as regulatory changes, news events, or market sentiment.
To perform comprehensive market analysis, you need to consider other factors alongside on-chain analysis, such as technical analysis and fundamental analysis.
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10 On-Chain vs. Off-Chain Data
โOn-Chain Data
On-chain data refers to information that is stored and processed directly on a blockchain network.
When a transaction is made on-chain, it is validated by the network’s participants through a consensus mechanism, such as proof-of-work or proof-of-stake.
Once validated, the transaction is added to a block and permanently recorded on the blockchain.
This ensures transparency and decentralization, as anyone can view the transaction details.
This type of data is immutable, meaning it cannot be altered or tampered with.
โOff-Chain Data
Off-chain data refers to information that is stored and processed outside of the blockchain network.
It can involve various mechanisms, such as payment channels or sidechains.
These transactions are often faster and offer more privacy compared to on-chain transactions.
However, they rely on third-party intermediaries for verification and can be subject to manipulation or censorship.
This type of data is typically stored in centralized databases or servers.
โThe difference
On-chain data provides transparency and security, making it publicly accessible for analysis, but it can also result in slower transaction speeds and increased costs.
Off-chain data, on the other hand, offers faster transaction speeds and lower costs but may sacrifice some level of decentralization and security.
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