What is On-Chain Data?
On-chain data refers to transactions that have been verified and are recorded on a blockchain. On-chain data is openly accessible through block explorers like Etherscan and BscScan, and users can use this information to determine potential price movements.
Key Takeaways
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On-chain analysis uses the data to predict trends and gauge market sentiment – it involves monitoring how funds move on the blockchain to detect potential investment opportunities.
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On-chain analysis leverages multiple metrics, such as active addresses, transaction volume, supply distribution, and total value locked in relation to the price action of an asset.
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Realized profits and losses, supply in profit or loss, and realized capitalization are the primary on-chain indicators for market action.
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Glassnode, Dune Analytics, and Nansen are some popular tools for visualizing on-chain data.
Unlike other asset classes, crypto transactions from public blockchains are freely accessible, making them suitable for data science and machine learning. You can easily extract and analyze blockchain data, which is otherwise called on-chain analysis. Through this rich, open financial data, you can acquire valuable insights into market trends, sentiment, and behavior of other investors.
Constantly watching and tracking the market is an integral strategy to potentially profit. Though fundamental and technical analysis offers insight into various market trends, extracting data from on-chain sources provides a bird's view of the blockchain. This doesn't mean they're mutually exclusive, however. You can utilize all three methods together when analyzing a cryptocurrency's potential.
In this article, we'll dive into what on-chain analysis is and how you can leverage it to enrich your trading and investing strategy.
What Does On-Chain Mean? On-Chain vs. Off-Chain
Before defining on-chain analysis, let's learn what on-chain is and how it compares with off-chain. As the name suggests, on-chain refers to transactions verified and recorded on a blockchain. Verification and recording are done by miners, in the case of Proof-of-Work (PoW) blockchains and stakers, in the case of Proof-of-Stake (PoS) blockchains. Anyone from anywhere can access on-chain transactions recorded on public blockchains.
On the other hand, off-chain is the opposite of on-chain. It refers to transactions verified and recorded outside the blockchain, by a Layer 2 chain, typically at minimal costs and faster transaction speeds.
Technical Analysis vs. On-Chain Analysis vs. Fundamental Analysis
Fundamental Analysis
Fundamental analysis strives to understand an asset by factoring in multiple aspects, like its market capitalization, trading volume, its utility, the number of holders, and the authenticity of the team behind it. This analysis is necessary to establish whether an asset is overvalued or undervalued. Here is an example of a simple fundamental analysis of bitcoin (BTC).
BTC has a maximum supply of 21 million coins, and 19.3 million are already in circulation. This implies only 1.7 million bitcoins are left to be added into circulation, driving the scarcity of BTC. According to the laws of demand and supply, the more scarce an asset is, the more value it gains. These details are part of the fundamental analysis you can use to make a wise investment decision.
Technical Analysis
Technical analysis analyzes cryptocurrencies using data from previous performances to forecast possible market performances. Technical and fundamental analysis factor in various price aspects. Fundamental analysis derives price movements from economic activities, fundamental releases, and geopolitical events. On the contrary, technical analysis focuses primarily on past activities, price movement, and trading activity.
Let’s use the price movement of BTC from November 2020 to July 2021 to show how technical analysis works. The chart above exemplifies a head and shoulder pattern, a potential price movement reversal pattern where any breakout from the neckline signals a major price change. The price of BTC fell from $50,000 to almost $35,000 when it broke below the neckline on 15th May 2021. If you're interested to find out more about technical analysis, check out our articles on long wick candles and higher highs.
On-Chain Analysis
On-chain analysis considers verified and recorded data on the blockchain to predict trends and gauge market sentiment. In other words, on-chain research involves monitoring how funds move on the blockchain to detect potential investment opportunities. It's unique to the crypto space since other asset classes don't run on public ledgers. You can conduct an on-chain analysis to determine why various market participants buy or sell a given asset. Below is an example.
Through an on-chain analysis platform like Glassnode, you can view various activities of BTC investors. For instance, whether they are actively depositing assets to centralized exchanges (CEXs) or withdrawing them to decentralized wallets. A high inflow to CEXs suggests the chance that they will dump their holdings, while a high influx to decentralized wallets means they are planning to hold for some time. You can use this information to guide you in making a wise investment decision.
How to Analyze On-Chain Data
On-chain analysis leverages multiple metrics, such as active addresses, transaction volume, supply distribution, and total value locked in relation to the price action of an asset.
Active Addresses
Analyzing active addresses on a blockchain network can provide insights into user engagement and adoption. Over time, an increase in dynamic addresses indicates growth in the network's user base, while a decrease in active addresses may signal a lack of interest or adoption. To analyze active addresses, you can track the daily or weekly number of unique addresses that have sent or received assets on the network. It's also important to consider the rate of change in active addresses over time and compare it to other metrics, such as transaction volume. To track active addresses on the blockchain, you can use explorers like Etherscan or BscScan.
Transaction Volume
Transaction volume measures the total number of transactions on a blockchain network over a given period. You can use it to assess the level of network activity and the demand for the underlying asset.
Analyzing transaction volume can help identify trends and patterns in user behavior, such as spikes in transaction volume during periods of high market volatility. You can track the daily or weekly number of transactions on the network and the average transaction size and fee to evaluate transaction volume. Likewise, this information is also available on blockchain explorers.
Supply Distribution
Analyzing supply distribution on a blockchain network can provide insights into the level of decentralization and concentration of tokens. Supply distribution measures the distribution of the total supply of a cryptocurrency among the holders.
A more evenly distributed supply indicates a more decentralized network, while a concentration of tokens among a few large holders may indicate a higher level of centralization. To analyze supply distribution, you can track the number and size of wallets holding a certain percentage of the cryptocurrency's total supply.
Total Value Locked
Total value locked (TVL) measures the total value of assets locked in smart contracts or decentralized applications (dApps) on a blockchain network. You can use it to assess the level of adoption and usage of dApps and the demand for the underlying asset. To examine TVL, you can track the daily or weekly value of assets locked in different dApps on the network and the number of users and transactions. It's also important to compare TVL across different dApps and networks to identify trends and patterns in user behavior. To check on a chain's TVL and how it compares against the rest of the market, you can use a tool like DefiLlama.
On-Chain Indicators for Market Action
Here are three on-chain indicators for price action:
Realized Profits and Losses
Realized profits and losses (RPL) is an on-chain metric for floating gains/losses realized after selling an asset. Once you purchase a digital currency, you will incur a profit/loss caused by the price movements. You establish your RPL by comparing the amount realized to the realized income. If the outcome is positive, you realize profits; if they turn negative, it is a loss.
By tracking RPL over time, you can gain insights into the behavior of long-term holders and their sentiment towards a given asset. For example, it can help to identify buying and selling opportunities. If RPL is high, it may indicate that long-term holders are taking profits and may be more likely to sell, creating potential selling pressure. On the other hand, if RPL is low, it may indicate that long-term holders are holding on to their assets, which could indicate a bullish sentiment and a potential opportunity to buy.
Supply in Profits or Loss
Supply in profit is the number of coins in a blockchain that is currently in profit – the price at which they were last moved is less than their current price. On the other hand, supply in loss is the number of coins in a blockchain that is currently in loss – the price at which they were last moved is higher than their current price.
You calculate supply in profit by establishing the number of coins last moved when the price was below the current price (the price has appreciated since the assets were last transferred). During bull markets, most of the supply in circulation prints profits, while during bear markets, the supply in profits drops gradually to hit bottom at the end of each bear.
When a cryptocurrency reaches a price level where most investors profit, they may be more likely to sell, creating a potential resistance. Conversely, when a cryptocurrency reaches a price level where many investors are at a loss, they may be more likely to hold or buy more, creating potential support.
Realized Capitalization
Realized capitalization is a variation of market capitalization valuing each unspent transaction output (UTXO) based on its former historical price change, unlike its current price. Consequently, instead of the average market value of assets, realized capitalization echoes the realized value of the available coins in a blockchain.
The concept behind realized capitalization was about establishing an on-chain metric that minimizes the impact of lost tokens and value tokens according to the latest state of an account chain. Normally, when tokens get lost, the market capitalization doesn't account for them.
Realized cap differs from the above approach by revaluing each last moved asset to its latest value. Therefore, if you spend an asset at a price higher than when you last transferred it, it revalues to a higher price and leaves a corresponding increase in the realized capitalization.
Top 3 Tools for Visualizing On-Chain Data
These are the top three tools for visualizing on-chain data:
Glassnode
Glassnode is one of the most popular on-chain analysis tools that offer cryptocurrency market insights through on-chain indicators. Established in 2018, Glassnode strives to simplify users' research process and enrich their decision-making by providing them with market intelligence and related on-chain data.
Popularly known for its comprehensive reports of market indicators for various digital currencies, Glassnode has multiple applications with revolutionary ways of staying ahead of the crypto trading curve. Its live data presents numerous charts and dashboards with in-depth insights on wallet activity, balances, network growth, token supply, number of holders, and many more.
Main Features
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Multiple on-chain market indicators for over 900 assets.
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Over 200 metrics
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Customizable dashboards with functionalities for incorporating more metrics.
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Comparing various metrics for available assets.
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TradingView integration.
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In-depth resources on popular networks and assets.
Pricing
Glassnode supports pricing packages as follows:
Standard – Offers the most basic on-chain analysis and market metrics for crypto enthusiasts. It's free of charge.
Advanced – Provides updated blockchain market indicators and futures data for ambitious investors. It costs $29 monthly, is paid annually, and comes with a 14-day free trial.
Professional – Offers the most advanced and up-to-date on-chain and futures data for seasoned traders. It costs $799 per month, paid annually.
Institutional – A customized plan for institutions.
Dune Analytics
Dune is another popular on-chain analytics tool you should consider. Unlike other analytical tools that involve new scripts, you can query the Dune database to gather almost any on-chain information. Dune is known for querying the Ethereum blockchain through simple SQL queries. Generally, the platform provides all the necessary tools to query, extract, and show high volumes of blockchain data.
Main Features
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Easily digestible information and visualized charts and graphs.
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Access to multiple metrics.
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It extracts on-chain data and classifies it into SQL databases that can be queried.
Pricing
Dune supports three pricing plans as follows:
Community – Supports standard performance and unlimited executions. It'sIt's free of charge.
Thug Life – Guarantees faster (4x) performance, 2000 executions/month, 100 private queries, ten private dashboards, and 250 CSV downloads/month. It costs $420/month.
Elite – Provides the fastest (8x) performance, 4000 executions/month, 1000 private queries, 100 private dashboards, 1000 CSV downloads/month, and a Remove Watermark feature. It costs $1337/month.
Nansen
Unlike Glassnode and Dune, Nansen combines blockchain data with 250M+ labeled wallets to offer on-chain analytics. Though Nansen is ideal for professional crypto investors looking for in-depth on-chain research, newbies can still use it to learn more about digital currencies.
Main Features
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250M+ wallet labels.
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In-depth dashboards.
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Wallet Profiler, ETH tracker, decentralized exchange (DEX) trades, and CSV data.
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You can easily detect patterns and predict price movements.
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Customizable smart alerts.
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Custom reporting.
Real-time on-chain data for popular networks, like Ethereum, BNB Smart Chain, and more.
Pricing
Nansen supports four pricing plans:
Standard – Nansen-powered analytics for non-fungible tokens, DeFi, wallets, Smart Money, wallet and token watchlists, NFT research reports, Nansen portfolio, and ten smart alerts. It's ideal for cryptocurrency explorers and costs $100/month billed annually.
VIP – Besides standard features, the package supports 100 smart alerts, exclusive VIP dashboards, early access to new dashboards, access to the research portal, advanced dashboards, and personalized training. It costs $1000/month billed annually and is ideal for professional traders.
Alpha – Besides the VIP features, the Alpha package supports institutional research, an exclusive Discord community, white-glove support, 1:1 training and conversations, weekly war room calls, and exclusive in-person events. It'sIt's ideal for full-time investors and costs $2000/month billed annually.
Enterprise – Guarantees Nansen access customized to your needs at custom prices.
Conclusion
In an era where data is the new oil and blockchain is transforming digital value, the importance of on-chain analysis must be addressed. Multiple platforms, like Glassnode, Dune, and Nansen, have emerged, offering crypto investors numerous easy-to-use on-chain indicators and data sets. However, the insights and alerts you get from these tools should only guide you in making wise investment decisions – they are not error-proof.
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001
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