Unveiling On-Chain Analysis: A Comprehensive Guide for Crypto Traders and Investors
You will agree with me that crypto is volatile, and any bad decision can lead to huge losses. Like in other traditional financial systems, one needs to have as much information as possible before making a decision. Crypto transactions are open to the public, but they are not easy to track. You can see the movement of money on a blockchain in the form of addresses, but you can't trace it to find out the exact individuals involved in a transaction. This makes it almost impossible to recover money lost in crypto. That is why on-chain analysis is very important.
The availability of transaction records to the public is beneficial for making financial decisions in crypto. We can analyze these records to gain real-time knowledge of what is happening in the blockchain network. On-chain analysis can be carried out in blockchain explorers such as CoinMarketCap, Etherscan, BTC, and others. These explorers can be a little confusing, so platforms like Glassnode, Nansen, Dune Analytics, and many more are available to help us make sense of the large amount of data.
What this article is
This article isn't focused on the technical aspects of on-chain analysis. I also wouldn't consider its history. However, I want both experienced and, most especially, new crypto traders to understand the importance of on-chain analysis as they plan their strategies. I will also consider the metrics that matter in on-chain analysis. Things traders should look for while performing on-chain analysis and common tools for visualizing blockchain data.
What is On-chain analysis?
On-chain analysis is simply studying available blockchain transaction data to understand market trends, enabling analysts to gain insight into the behavior of the cryptocurrencies in that network. The information obtained from on-chain analysis will help guide traders and investors in developing their investment strategies.
As an investor, you don't want to invest in crypto projects that are headed for doom. Studying blockchain transaction data will help you determine the health of a network and whether it is safe to invest in or not. Rather than depending on market hype, with on-chain analysis, you develop a more balanced perspective of the potential a coin possesses.
Understand that the market is not static; it is ever-changing. This means that on-chain analysis isn't a one-time thing. Using various tools, you can keep in touch with the dynamics of the crypto market. Information stored on a blockchain cannot be altered, and as such, you can analyze cryptocurrency behavior over whatever time frame you choose. Finally, I will mention a few platforms for visualizing.
The Importance of On-chain Analysis
As mentioned earlier, on-chain analysis is an important part of cryptocurrency trading, especially given how volatile the market is. A number of factors that are largely out of a trader's control cause the market to fluctuate frequently. Factors such as government regulations, market sentiments, and advances in technology. Conducting on-chain analysis helps an investor make informed decisions by understanding how the market previously reacted to these factors.
Analyzing data recorded on the blockchain provides investors with valuable market insight. A major benefit of cryptocurrency trading is how transparent the data on blockchains is. Anyone who is willing to look can easily gain access to these records. Even though the personal information of traders remains anonymous, blockchain transactions are transparent, with records of the activities within a crypto network accessible to the public.
Before investing in a crypto network, it is important to investigate the health of the network to determine the potential risk. Clearly, cryptocurrency is a risky business; still, some networks and their tokens are more stable than others. An investor needs to know the level of adoption of a coin, liquidity, wallet activities, transaction volumes, and other important metrics. Knowledge of these and proper interpretation will save investors from purchasing coins that are likely to fail.
Furthermore, on-chain analysis can help us detect suspicious activities on a blockchain. Fraud, money laundering, and other illegal activities within a cryptocurrency network can be identified easily, given that activities within a blockchain are open to the public. Suspicious transactions meant to manipulate the market can also be detected.
Metrics That Matter in On-chain Analysis
Conducting on-chain analysis can be overwhelming, as there is just too much data to consider. In order not to get lost focusing on data that doesn't really count, it is important that we identify metrics that should be prioritized during analysis. Interpreting these metrics will give you valuable insight into the overall market sentiment and dynamics of a coin. Let us consider a few of these important metrics:
Transaction Volume:
It is important to consider the level of activity and demand for a token within a network. This will help you assess the viability of the coin you have in mind, judging from its level of economic activity. Transaction volume is a measure of the total number of transactions in a blockchain within the period of consideration.
Active Addresses:
The number of unique addresses transacting in a network is another vital piece of information. During analysis, the focus isn't on the total number of users in a network; rather, it is on only the addresses actively engaging. This data should be considered within a given timeframe if it is to be of any real value.
Supply Distribution:
Analyzing the distribution of supply provides insight into the concentration of wealth within a blockchain network. Identifying if a coin is held by a few large holders or if it is evenly distributed in the network reveals the level of decentralization. This involves tracking the number of wallets holding a substantial amount of the coin in circulation.
Token Velocity:
Token velocity is a measure of the speed at which coins circulate within a network. A high token velocity indicates frequent trading and can reflect a more active and liquid market.
Tools for Visualizing Blockchain Data
Investors need a simple representation of blockchain data for quick interpretation. The transactions that go on in a blockchain are complex and can be difficult to both monitor and interpret. They are better understood when presented in charts or graphical forms. Analysts and investors can simply look at the graphs to detect patterns and market trends. Some popular tools for visualizing blockchain data include:
Dune Analytics:
Dune Analytics is specifically designed to allow users to query the Ethereum blockchain network. With Dune, users can query the network using premade SQL queries. Users are also allowed to combine multiple queries to create custom dashboards.
Glassnode:
Glassnode provides users with comprehensive reports of market indicators for several digital currencies. With its live data explorer, users can stay informed on market changes presented in charts and dashboards. It is ideal for monitoring and analyzing market trends in various crypto networks.
Nansen:
Nansen provides users with on-chain activity reports by integrating blockchain data with 250M+ wallet labels. The software is suitable for both experts and crypto newbie investors seeking to stay in touch with market trends and sentiments. It provides data for a number of networks like Ethereum, Polygon, Binance Smart Chain (BSC), and more.
Conclusion
Analyzing on-chain data is one activity crypto investors cannot afford to ignore. As an investor**, you don't want to risk investing in a cryptocurrency network you have not taken the time to investigate. Insightful data about blockchain activities can greatly aid your decision-making. It might just be the difference between losing your money and making profitable investments. More than just analyzing data, it is important that you know what to analyze. This article on on-chain analysis points out some important metrics you need to consider before investing in a project.