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, also known as on-chain analytics. With this rich, open financial data, you can gain valuable insights into market trends, sentiment, and other investor behaviors.

Constantly observing and tracking the market is an integral strategy for potential profit. While fundamental analysis and technical analysis can provide insights into various market trends, extracting data from on-chain sources can provide a bird’s-eye view of the blockchain. However, this does not mean that they are mutually exclusive. You can use all three methods simultaneously when analyzing the potential of a cryptocurrency.

In this article, we’ll take a deep dive into what on-chain analysis is and how you can use it to enrich your trading and investing strategies.

What does on-chain mean? The difference between on-chain and off-chain

Before defining on-chain analysis, let's understand what on-chain is and how it compares to off-chain. As the name suggests, on-chain refers to transactions that are verified and recorded on the blockchain. In the case of Proof of Work (PoW), the verification and recording are done by miners, while in the case of Proof of Stake (PoS), the verification and recording are done by validators. On-chain transactions recorded on a public blockchain can be accessed by anyone, anywhere.

On the other hand, off-chain is the opposite of on-chain. It refers to transactions that are verified and recorded outside the blockchain through Layer 2, which usually has lower costs and faster transaction speeds.

Technical Analysis vs. On-Chain Analysis vs. Fundamental Analysis

Fundamental analysis

Fundamental analysis seeks to understand an asset through multiple factors, such as its market capitalization, trading volume, utility, number of holders, and the authenticity of the team behind it. This analysis is necessary to determine whether an asset is overvalued or undervalued. Below is a simple fundamental analysis example for Bitcoin (BTC):

BTC has a maximum supply of 21 million, and 19.3 million are currently in circulation. This means that only 1.7 million bitcoins are left to circulate, leading to the scarcity of BTC. According to the law of supply and demand, the scarcer an asset is, the more value it gains. This information is part of the fundamental analysis that you can use to make informed investment decisions.

technical analysis

Technical analysis uses data from past performance to analyze cryptocurrencies to predict likely market performance. Technical and fundamental analysis analyze various factors that affect price. Fundamental analysis derives price trends from economic activity, information releases, and geopolitical events; in contrast, technical analysis focuses primarily on past activity, price movements, and trading activity.

Let’s use BTC’s price action from November 2020 to July 2021 to illustrate how technical analysis works. The chart above illustrates a head and shoulders pattern, a potential price action reversal pattern where any break above the neckline signals a major change in price. BTC’s price fell from $50,000 to nearly $35,000 on May 15, 2021, when it broke the neckline.

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 money moves on the blockchain to discover potential investment opportunities. It is unique to the crypto world because other asset classes do not run on public ledgers. You can conduct on-chain analysis to determine why different market participants buy or sell a given asset. Below is an example.

Through on-chain analysis platforms like Glassnode, you can view various activities of BTC investors. For example, whether they are actively depositing assets into centralized exchanges (CEX) or withdrawing assets to decentralized wallets. Large inflows into CEXs indicate that they are likely to sell their holdings, while large influxes into decentralized wallets mean that they plan to hold for a while. You can use this information to guide you in making informed investment decisions.

How to analyze on-chain data

On-chain analytics often utilize multiple metrics such as active addresses, transaction volume, supply distribution, and total value locked in relation to an asset’s price action.

Event Address

Analyzing active addresses on a blockchain network can provide insights into user engagement and adoption. An increase in active addresses over time indicates growth in the network's user base, while a decrease in active addresses can indicate a lack of interest or adoption. To analyze active addresses, you can track the number of unique addresses sending or receiving assets on the network on a daily or weekly basis. It is also important to consider the rate of change of active addresses over time and compare it to other metrics, such as transaction volume. To track active addresses on a blockchain, you can use explorers such as Etherscan or BscScan.

Trading volume

Transaction volume measures the total number of transactions on a blockchain network over a given period of time. You can use this to assess the level of network activity and 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 greater market volatility. You can assess transaction volume by tracking the number of transactions per day or week on the network, as well as the average transaction size and fees. Again, this information is available on blockchain explorers.

Supply Allocation

Analyzing supply distribution on a blockchain network can provide insight into how decentralized and centralized a token is. Supply distribution measures how the total supply of a cryptocurrency is distributed among its holders.

A more evenly distributed supply indicates a more decentralized network, while a concentration of coins among a few large holders may indicate greater centralization. To analyze supply distribution, you can track the number and size of wallets that hold a certain percentage of a 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 this to assess the level of adoption and usage of a dApp and the demand for the underlying assets. To check TVL, you can track the daily or weekly value of assets locked in different dApps on the network as well as the number of users and transactions. It is also important to compare the TVL of different dApps and networks to identify trends and patterns in user behavior. To check the TVL of a chain and how it compares to the rest of the market, you can use a tool like DefiLlama.

On-chain indicators of market behavior

Here are three on-chain indicators of price action:

Realized Gains and Losses

Realized Profit and Loss (RPL) is an on-chain metric that measures the floating profit or loss realized after selling an asset. Once you buy a cryptocurrency, you will incur a profit/loss due to price movements. You determine your RPL by comparing the realized amount to the realized income. If the results are positive, you have realized a profit; if they turn negative, it's a loss.

By tracking RPL over time, you can gain insight into the behavior of long-term holders and their sentiment towards a particular asset. For example, it can help identify buy and sell 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 onto their assets, which may indicate bullish sentiment and potential buying opportunities.

Supply in Profit and Loss

The profit supply is the number of tokens in the blockchain that are currently in profit — the price they last transferred was lower than the current price. On the other hand, the loss supply is the number of tokens in the blockchain that are currently in loss — the price they last transferred was higher than the current price.

You can calculate the profit supply by determining the number of tokens that were last moved when the price was lower than the current price (the price has appreciated since the last asset transfer). During bull markets, the circulating supply is mostly profit supply, while during bear markets, the profit supply gradually decreases, bottoming out at the end of each bear market.

When a cryptocurrency reaches a price level where most investors are making a profit, they may be more likely to sell, creating potential resistance. Conversely, when a cryptocurrency reaches a price level where many investors are losing money, they may be more likely to hold or buy more, creating potential support.

Realized Market Cap

Realized cap is a variation of market cap that values ​​each unspent transaction output (UTXO) based on its previous historical price change, which is different from the current price. Therefore, instead of the average market value of an asset, realized cap corresponds to the realized value of tokens available in the blockchain.

The concept behind realized market cap is to build an on-chain metric that minimizes the impact of lost tokens and values ​​tokens based on the latest state of the account chain. Typically, when tokens are lost, market cap does not take them into account.

Realized market capitalization differs from the above method in that it revalues ​​each last moved asset to its most recent value. So if you spend an asset at a higher price than when you last moved it, it will revalue to that higher price and increase the realized capitalization accordingly.

Three major tools for on-chain data analysis

Here are the top three tools for on-chain data analysis:

Glassnode

Glassnode is one of the most popular on-chain analysis tools that provides cryptocurrency market insights through on-chain metrics. Founded in 2018, Glassnode is dedicated to simplifying the research process and helping users make decisions by providing them with market intelligence and relevant on-chain data.

Widely known for its comprehensive reports on various cryptocurrency market indicators, Glassnode has multiple applications to stay ahead of the curve in a revolutionary way. Its real-time data presents a plethora of charts and dashboards, providing in-depth analysis of wallet activity, balances, network growth, token supply, number of holders, and more.

main feature

  • Multiple on-chain market indicators for over 900 assets

  • Over 200 indicators

  • Customizable dashboards with the ability to incorporate more metrics

  • Compare various metrics of available assets

  • TradingView Integration

  • In-depth resources on popular networks and assets

price

The pricing packages supported by Glassnode are as follows:

  • Standard – Provides the most basic on-chain analysis and market indicators for crypto enthusiasts. It is free.

  • Premium – Provides updated blockchain market indicators and futures data for ambitious investors. It costs $29 per month, paid annually, and comes with a 14-day free trial.

  • Professional – Provides the most advanced and up-to-date on-chain and futures data for experienced traders. It costs $799 per month, paid annually.

  • Institutions - Customized plans for institutions.

Dune Analytics

Dune is another popular on-chain analysis tool that you should consider. Unlike other analysis tools that involve new scripts, you can query the Dune database to collect almost all on-chain information. Dune is known for querying the Ethereum blockchain through simple SQL. In general, the platform provides all the necessary tools to query, extract, and display large amounts of blockchain data.

main feature

  • Easy-to-understand information and visual graphics

  • Access multiple metrics.

  • It extracts on-chain data and categorizes it into a queryable SQL database

Price

Dune supports the following three pricing plans:

  • Community – supports standard performance and unlimited executions. It is free.

  • Thug Life – guarantees faster (4x) performance, 2000 executions/month, 100 private queries, 10 private dashboards, and 250 CSV downloads/month. It costs $420/month.

  • Elite – Provides the fastest (8x) performance, 4,000 executions/month, 1,000 private queries, 100 private dashboards, 1,000 CSV downloads/month, and watermark removal. It costs $1,337/month.

Nansen

Unlike Glassnode and Dune, Nansen combines blockchain data with more than 250 million tagged wallets to provide on-chain analysis. While Nansen is well suited for professional cryptocurrency investors seeking in-depth on-chain research, newbies can still use it to learn more about digital currencies.

main feature

  • 250M+ Wallet Tags

  • In-depth dashboard

  • Wallet Profiler, ETH Tracker, DEX Transactions, and CSV Data

  • You can easily detect patterns and predict price movements

  • Customizable smart alerts

  • Custom reports

  • Real-time on-chain data for popular networks (such as Ethereum, BNB Smart Chain, etc.)

Price

Nansen supports four pricing plans:

  • Standard – Nansen-powered NFT analytics, DeFi, wallets, smart coins, wallet and token watchlists, NFT research reports, Nansen portfolios, and ten smart alerts. It’s ideal for cryptocurrency explorers and costs $100/month when billed annually.

  • VIP – In addition to the standard features, this package also supports 100 smart alerts, an exclusive VIP dashboard, early access to new dashboards, access to the research portal, premium dashboards, and personalized training. It costs $1000/month on an annual basis and is ideal for professional traders.

  • Alpha – In addition to VIP features, the Alpha package also supports institutional research, an exclusive Discord community, white glove support, 1:1 training, weekly conference calls, and exclusive in-person events. It is ideal for full-time investors and costs $2,000/month billed annually.

  • Enterprise – Tailor Nansen access to your needs at a custom price.

in conclusion

In an era where blockchain is changing digital value, the value of data is crucial and the importance of on-chain analysis must be recognized. Several platforms such as Glassnode, Dune, and Nansen have emerged to provide cryptocurrency investors with a large number of easy-to-use on-chain indicators and data sets. However, the insights and alerts you get from these tools can only serve as auxiliary factors to guide your investment decisions - they are not infallible.