What Is On-Chain Analysis?

28 March 10:05

We see it all the time - big elaborate charts decorated with candlesticks, unusual metrics, and intensive squiggles that make little sense to the general population. Particularly as cryptocurrency has been nurtured into an immense ecosystem, these feats have become more commonplace and often dictate the way in which top traders gauge when to buy and sell.We see it all the time - big elaborate charts decorated with candlesticks, unusual metrics, and intensive squiggles that make little sense to the general population. Particularly as cryptocurrency has been nurtured into an immense ecosystem, these feats have become more commonplace and often dictate the way in which top traders gauge when to buy and sell.

Referred to as ‘on-chain analysis’, this kind of chart analysis denotes the leveraging of public blockchain information in order to ascertain an informed estimation of future market activity. This ultimately enables traders to form strategies and maintain some control over their positioning within the market at large.

However, to a beginner, this intensive and complex world of on-chain analysis may appear daunting and overwhelming - especially when high-level financial and economical terms are used so often.

What Does On-Chain Mean?

Whilst the term ‘on-chain analysis’ does appear relatively complex, the fundamentals of this concept are rooted in simplicity and foundation level information. The term ‘on-chain’ denotes information derived from accessible blockchain information. Due to the decentralisation and transparency of the decentralised financial world, all blockchain information is widely accessible for free, whether this be transaction information, holding addresses, price movements, or even more complicated financial metrics.

Some metrics may require memberships to various platforms or even your own technology to decipher, a majority of integral market metrics can be found easily online for a wide variety of different cryptocurrency assets.

Yet, to some, on-chain analysis may appear to be out of their depth and beyond their own capabilities. However, almost every trader has actually divulged into on-chain trading - even if they were not aware of it. Simply reading an asset’s price chart and determining the current rate at which it is trading is a prime example of simplistic and accessible on-chain analysis.

A price chart acts as an ‘indicator’. Whilst this term may seem rooted in economics and relatively complex, a market indicator essentially refers to a different facet of market information which is directly influenced by an asset’s performance and has the power to directly influence an asset’s performance also.

On-chain analysis is intended for the purpose of providing financial analysts and traders alike with a more insightful look into the way in which the market is currently responding to internal and external stimuli - whether these be sociopolitical factors or just general trading information. By gaining an understanding into the underlying systems dictating cryptocurrency performance, many analysts and traders utilise this information to develop trading strategies and better position themselves in the market.

For example, if a bearish marketspace is in full force, many traders may have developed a strategy to continue accruing their desired assets so that they can sell them for a profit as the market experiences an uptrend. In doing so, many traders are able to better maximize the prospective profitability of their portfolio and better position themselves within a current market landscape.

Whilst most investors may not have delved into ASOL or RHODL ratio charts, the most basic standardised kind of on-chain analysis is looking at price charts. Acting as the backbone of all financial investments, price charts dictate highs, lows, and plateaus within a respective financial market. In doing so, they indicate periods of time in which buying, selling, or holding an asset is the most viable based on market conditions.
Take Bitcoin for example, if the price chart appears to be in a downtrend, this often signals a period of time in which many investors choose to accrue more BTC and vice versa when the market is experiencing an uptrend. When investing in an asset, price charts are often the first thing traders reference before buying - therefore meaning that the first step of on-chain analysis is far more simple than previously thought.
However, if you are just gettin started in the world of on-chain analysis, here are some integral indicators you may encounter.

The Most Common Indicators in the On-Chain Analysis

Price

The most simple indicator of them all - price essentially maps out the current price performance of an asset over a designated period of time. Often detailed by candlesticks or simple lines marked in either red or green (based on their positive or negative direction) price denotes the most valuable and simplistic means of ascertaining the performance of an asset.
For example, if an asset has experienced a positive price movement, traders will understand the asset is performing well and be incentivised to sell or continue holding the asset in the event it accrues more profit.

On a marketwide scale, price provides an insight into performance that is unanimously understood and truly reflects the most valuable part of an asset - its valuation.

Transaction Count

You may be wondering - why is transaction count important? Well, transaction counts often signal the activity of traders and their response to the market - which can ultimately dictate future performance. Encompassing buying and selling, transaction count is a well rounded insight into general market movement. However, transaction count is best paired with price for a fully insightful glance into how this transaction count reflects the feelings and opinions of holders.

For example, if an asset has massively declined in value across a 7 day period, transaction count is likely to be high. This is often as a result of traders selling to avoid losing money on the position they bought into the asset at or as a result of panic - yet it may also signal more long term traders buying into the asset to further strengthen their positions. This emphasises a bearish landscape.

Similarly, if an asset has witnessed significant growth in value across a 7 day period, transaction count is also likely to be high. Yet this is likely due to an influx of traders ‘FOMO-ing’ into the asset, as well as traders selling their holdings of the asset to generate a profit. This indicates a bullish landscape.

When transaction count is placed into these contexts it enables general traders to understand whether other traders are feeling bullish or bearish sentiments about the marketplace - which can ultimately signal how the market may respond in coming weeks or months.

Active Addresses

Borrowing from a relatively similar concept to transaction count is active addresses - which refers to the volume of cryptocurrency wallets holding a respective asset at a given period of time. Whilst the two have their significant differences, the volume of active addresses can signal whether traders are experiencing bullish or bearish sentiments about the marketplace.

For example, if the number of active addresses has dramatically risen, this emphasises that more investors are pouring funds into the asset. Even if this coincides with negative price movements, an influx of investor interest into an asset may signal that traders are feeling bullish on the asset and intend to purchase more before the price momentum gears upwards, ultimately as a means of generating profit.

If active addresses fall, this often signals that many traders are selling their positions. Sure, many people sell when a market increases in value, yet many often buy back their positions or only partially sell. However, when active addresses decline in the event of negative price movements this can signal bearish sentiments, as individuals are likely selling their positions without making a return.

Ultimately, active addresses when paired with both price and transaction count can provide a detailed insight into whether the cryptocurrency market is experiencing bearish or bullish sentiments.

How Is This Helping Traders?

Whilst price charts are but one of several hundred different means of on-chain analysis, it provides a sturdy foundation in which many traders build upon as their experience investing matures. On-chain analysis may appear to be a complex concept, yet at its core it is a surprisingly accessible means of informing investing strategy and proactively adjusting your market position.

Yet, it is fundamental to remember that not every metric will play a significant role in the way you choose to analyse the market. As with anything, specific information will enable you to formulate an informed idea that aligns with your intentions. For example, if you wanted to learn about Gate.io’s perpetual crypto derivative, you would only research this as opposed to researching the entire roster of derivatives available on the platform. This applies similarly within blockchain, as if you wanted to gauge whether more traders are buying or selling Bitcoin or any other asset, you would likely monitor exchange net flows, transaction count, long/short term holders, etc.

Many traders embark upon their research into on-chain analysis with a specific goal in mind - which ultimately informs their overall response to the current market landscape.

Often, when the cryptocurrency market is plunged into either immensely bearish or bullish territory, professional analysts and traders alike tend to reference a diverse range of ‘blanket’ metrics; with blanket referencing metrics that provide an insightful overview to a majority of market activity, as opposed to a niche. In doing so, this can provide a perspicacious insight into why the market is reacting in such a way, in a far more significant manner than just simply referencing price charts could provide.

How Can I Use On-Chain Analysis?

After reading this, you may be stumped as to where you should start with on-chain analysis. Yet, it is crucial to remember that due to the decentralisation of the cryptocurrency market that these resources lie at your fingertips. Sure, many metrics require specialist memberships or even your own software to effectively analyse, however, the core ‘blanket’ metrics are widely available across the internet without any associated fees.

By tapping into the world of on-chain metrics you have the potential to gain further insight into the way in which the cryptocurrency market truly works. Whilst it bears semblance to many traditional financial markets, the immense market volatility results in expedited movements that are often as a result of an underlying occurrence that would not typically occur within traditional finance. Through analysing a diversified range of market metrics, this will often provide you with a more detailed understanding of the integral factors that play a role in how an asset performs.

Additionally, delving into on-chain analysis enables you to formulate efficient investment strategies based on the assets you have an interest in. For example, if you have a portfolio composed of BTC, ETH, and LTC, examining metrics pertaining to these assets will enable you to make informed decisions in regards to accruing more of your chosen assets and potentially selling to generate a profit.

Ultimately, do not let the phrase ‘on-chain analysis’ scare you away from understanding how the cryptocurrency market works. You do not have to be a financial or economical expert to delve into the world of analysis and ultimately it may revolutionise the way you view investing and your portfolio.

Author：Matthew W-D, Gate.io Researcher
*This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.