In this detailed guide, we will discuss crypto on chain analysis, top 5 tools, top 3 analysts, and many more. Read till the end.
The assets evolving in the blockchain ecosystem are in no way similar to any traditional asset such as stocks, bonds, real estate, and other cash equivalents. So it cannot be treated with the same analytical methods to understand the change in behavior of markets. We need a new form of analysis that compresses public blockchain information to form unique perspectives, enhancing trading strategies and position management.
With on-chain analysis coming into the picture, we can now extract massive data sets from each asset’s public ledger. Even though the sample size is small, we can capture every on-chain action in history. The collection of blockchain data is paramount for breaking down market sentiment and investor behavior. It doesn’t matter if you are an experienced cryptocurrency trader or not- you need simplified data to identify undervalued/overvalued coins.
This article will go through everything related to on-chain analysis and help you get started with some of the best on-chain tools and analysts you can follow right now. Let’s get started.
What is On-Chain Analysis?
It is one unique analysis that takes an asset’s ledger and immutable record of market dynamics into consideration and establishes a macro view of the cryptocurrency market. On-chain analysts use this radically transparent information to assess supply and demand dynamics, human behavior, patterns of buying/selling, and miner activity.
By having a perfect memory of every transaction, every trade, and every timestamp, we can truly build promising perspectives to understand this free market. To perform on-chain analysis, you don’t have to major in data science or coding- you only need to know the fundamentals of a crypto network and understand how participants are interacting with it.
History of On-Chain Analysis
Most of the sophisticated on-chain tools came into existence only three or four years ago, but some of the metrics used now date back to 2011. We saw the bitcoin valuation metric for marking the age of bitcoin addresses, which helped us understand when coins were destroyed. In 2017, we saw Chris Burniske and Jack Tatar develop one of the most popular metrics called the Network Value to Transaction (NVT) ratio.
Using the NVT ratio, we can accurately determine the utility value of a cryptocurrency, and it also helps us figure out the transactional utility of the blockchain.
In a way, we often look at the NVT ratio as the price-earnings ratio, which is associated with equities and can be applied in a similar way to find value-adding stocks/coins. This particular metric was iterated multiple times to make it more accurate. To give you an example, let us take the Network Value to Transaction ratio Signal (NVTS), which is a metric developed by taking the 9-day moving average.
Coinmetrics, one of the best on-chain tools in the business, also made several improvements to this metric, and the most recent change is- they used free float supply to improve the ratio.
You can use so many metrics to build different viewpoints on the market, and most of them rely on the concept of UTXOs (Unspent Transaction Outputs). However, we face difficulty formulating metrics for Ethereum and ERC-20 tokens, as the account models for these networks are hard to track.
While there are so many new advancements in the on-chain community, few things remain the same. Blockchain archaeology is still at a very early stage. We have a small number of specialized roles, who can create original ideas and concepts, analyze microdata, and convert it into macro metrics.
Most-telling On-Chain Metrics you should use
Every on-chain analyst follows no rule or framework. Everyone uses different on-chain metrics to predict the market’s movement, but almost every cryptocurrency trader uses few prominent indicators. Here, we have listed most-telling on-chain metrics that give a broader perspective on the market:
The market capitalization of an asset determines its total network value, and it also helps us dive into some other aspects like- adoption, market size, and risk. It may not be a direct correlation, but it is used to determine different network characteristics. The total network value is measured by a simple multiplication of the price of an asset and its total circulating supply.
This is another iteration of the original market cap metric, as the transaction outputs are valued only the price when it was last moved. The current value of the coin is not taken into consideration. Realized capitalization of the market removes all the coins that are inactive in the network. This also affects the economy of any given chain. If the dormant coins were spent, they would be revalued at the current market value, increasing the realized cap significantly.
Market Phases & Cyclical Bottoms
The realized cap is used in various instances to understand market phases and predict accumulation periods. Here we have highlighted three market phases you need to know based on realized cap data:
- Bull Market- This is straightforward- if the realized cap keeps increasing, the market is characterized as a bull phase. From a technical point of view, this means coins purchased at significantly lower prices compared to current value are spent.
- Bear Market- Similarly, if the realized cap goes down continuously, the market is characterized as a bear phase. This usually takes place- when new participants enter the market by buying coins in off-chain exchanges.
- Accumulation Phases- Long-term holders/ smart investors swoop in as many coins as possible in the accumulation periods, which ultimately acts as support and shows an uptrend of the realized cap.
When the market cap is traded below the realized cap, we have seen a cycle bottom. In both 2011 and 2013, we observed the realized cap coincide with the bear market floor. Here, the realized cap acted as both resistance and support during the market bottoms and accumulation periods.
MVRV ratio is a simple metric used to sport market tops and bottoms. The ratio of market value to realized value gives us a sense of when the price is overvalued and undervalued.
The valuation part of an asset is done by MVRV-Z score and it is calculated in the following way-
MVRV-Z Score = Market Cap – Realized cap
Few other advanced metrics formed after leveraging the original MVRV ratio are LTH-MVRH and STH-MVRV. By using these indicators, we can assess the behavior of long-term investors and short-term investors, respectively.
Spent Output Profit Ratio (SOPR)
One of the most used metrics to gain macro market sentiment and profitability over a time period is SOPR. The ratio is formed by taking the coins valued at the time of UTXO creation and realized. SOPR is of great significance for doing any on-chain analysis, as it helps understand daily, hourly market behavior.
Here are few trends and frameworks you need to remember while using SOPR:
- When SOPR is greater than 1– Market participants realize profits (on average), which indicates they are selling at a higher price than the price they paid.
- When SOPR is less than 1- Market participants realize losses (on average), which indicates they are selling at a lower price than the price they paid.
- When SOPR hits exact 1- Selling coins at a break-even price (on average).
- SOPR keeps increasing- This means assets that represent illiquid supply are now in circulation.
- SOPR keeps decreasing- This means that coins in profit are not being sold or market participants realize losses.
Net Unrealized Profit/ Loss (NUPL)
The NUPL is used to determine the state of the network. By calculating the difference between unrealized profits and losses, we can measure the profitability of the network. If the NUPL value is above zero, the network is in a state of profit, and it is loss- when the value goes below zero. If you enter the blue region, you can book profits and exit, and you can re-enter when in the red region.
There are other variations of this metric- Unrealized loss, LTH-NUPL, and STH-NUPL. One can use these to understand a specific area of interest in the market or target a specific group of investors.
The Puell Multiple is developed by comparing daily coin issuance and the 365 moving average of daily coin issuance. Many on-chain analysts give importance to this metric, as it derives miner profitability and income stress.
New miners sell their coins to cover ongoing operational costs, and established mining facilities negate this sell-pressure by having excess coins in their treasuries. As a result, we see larger capital absorbing sell pressure from small miners.
When profits are realized, the Puell Multiple will be trending higher and easily exceeds the yearly average. After studying historical data, we came to a conclusion that values higher than 4.0 signal market tops.
Identifying market bottoms by evaluating mining activity is done through Puell Multiple. It is extremely challenging for miners to make profits during an extended bear market and cover operational costs. The market conditions force them out of the network by switching off their hardware. This is mainly to reduce power consumption. In the case of large mining communities, they will increase their share of the income and sell fewer coins. In the last few cycles, we have seen miner profitability go down by 50%, and at that time, the Puell Multiple was less than 0.5. Now, it is measured to be below 1.0.
Stablecoin Supply Ratio (SSR)
The Stablecoin supply ratio helps in estimating the buying power of BTC. When SSR is low, we can see more buying take place. In simple terms- it acts as a proxy to represent the dynamics between BTC and USD.
Network growth is a simple metric to calculate, but it gives a broader perspective on the market. It represents crypto adoption over time and is used to identify assets that are gaining/ losing traction.
Correlation to Bitcoin
We see this metric mainly on intotheblock. The Correlation to the BTC indicator helps us assess different assets that are being affected by bitcoin’s price fluctuations. This metric shows us the statistical relationship between two variables. If it is less than one, then it is indirectly proportional to bitcoin. If the number is closer to one, then we see a positive relationship. Correlation to BTC is helpful for investors to minimize risk. Whenever the price of BTC drops drastically, we can take necessary steps to cut down losses of assets related to it.
Top 5 On-Chain Tools in 2021
Now that you have a basic understanding of on-chain analysis and metrics used to assess the market, you can test out different on-chain tools available right now. We have listed the top five on-chain tools below:
Glassnode is one of the best on-chain data and intelligence platforms with a live data explorer and a range of advanced metrics for different assets. They have a weekly issue published on glass node insights, which provides a qualitative and quantitative view of the market. They also have in-depth reports on popular blockchains and digital assets- a good read to understand the markets with historical data. You can create a free account right now and have access to a bunch of indicators. If you wish to invest, you have two options- an advanced plan ($39) and a professional plan ($799).
Santiment is a unique on-chain tool that both traders and developers can use. For traders, they have a separate set of use-cases and tutorials, and in the case of developers, they give access to technical documentation of logic, algorithms, and several other Santiment metrics. The platform also offers different products to help traders with crypto analytics. Sansheets and SanAPI can be used for spreadsheet plugins and requesting data batches, respectively. Surprisingly, Santiment also provided SAN tokens to offset current price plans, and they plan to add stalking and burning features.
Coinmetrics is among the most trusted on-chain platforms for data and insights. It was founded in 2017 as an open-source project and aimed to bring economic significance to public blockchains. To support their goal and vision, they now have multiple products and services to help people make informed crypto investing decisions. Network data, market data, indexes, and risk management are the four main services offered by Coinmetrics. They also have a mobile application to simplify tracking data and cryptocurrency prices.
Cryptoquant monitors bitcoin, ethereum, stablecoin, and altcoins as a whole and gives an overview of network state using different metrics such as exchange flows, miner flows, bank flows, network data, and market data. They have four plans you can choose from- basic, advanced, professional, and premium. The main difference between these plans is custom alerts. Traders can set multiple alerts on each metric and be alerted when it goes above or below their desired value. We get access to all the metrics for a free version but no custom alerts and exclusive features.
Leveraging data science and AI, intotheblock generates accurate reports and provides market intelligence for the crypto market. Along with blockchain analytical tools, it also helps users with directional price predictions, Defi market data, and market sentiment analysis. The application’s layout is easy to use, and any new crypto investor can navigate through different financial and network metrics.
Three On-Chain Analysts you should follow on Twitter
Willy Woo is one of the best in business when it comes to extracting investment signals from blockchains. He started as an on-chain analyst in 2016 and got hooked to bitcoin’s network from a technological point of view. Currently, he writes forecasts for his paid subscribers every two-three weeks. Willy Woo graduated with an honors degree in engineering, and his twenty years of experience as a tech entrepreneur makes him an authoritative figure when it comes to on-chain.
One of the most active on-chain analysts on Twitter is Checkmate, and he works with glass node to bring weekly issues and newsletters. His masterclass provides everything you need to learn about on-chain analysis, and the best part about it is that you will be a part of an ever-growing community of like-minded crypto enthusiasts.
Will Clemente is a 19-year old Finance Major from East Carolina University and provides insights into various on-chain analytics. He works with Anthony Pompliano, and they discuss market conditions every week on his youtube channel. Will writes for more than 27,000 investors and is highly active with his substack newsletters. He mainly uses Glassnode for his analysis and helps new investors get an overview of what happened daily and weekly.
The future of finance is going to be on-chain based, so it is here to stay and help crypto traders all over the world with market insights. On-chain is still at a nascent stage, and we can see a boatload of improvements being made in the coming years. With more historical data being added and recorded on-chain, more people will adopt on-chain metrics as an additional tool for trade confirmations. Even if you are new to crypto and on-chain analysis, it is still recommended to use the tools given above and check out all metrics. Once you have the fundamentals clear, you can deep dive and correlate different metrics and form your own perspective on the market. That is how you will always have the edge over other players in the cryptocurrency space.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
Subscribe To Our Newsletter
Join our mailing list to receive Cryptocurrency investing and trading recommendations to your mailbox.
You have Successfully Subscribed!
Subscribe to get notified on latest posts.