Transaction Volume
One important factor in on-chain data analysis is transaction volume. Simply put, a high transaction volume indicates an active market.
However, not all volumes can be interpreted in the same way. Ideally, volume should align with price movements. If prices rise but transaction volume is weak, it is unlikely for the rally to last long.
Active Addresses
The number of active addresses on a blockchain indicates user interest. It is even better if the number of active addresses increases along with transaction volume. This indicates real adoption, not just noise.
Supply Distribution
In on-chain data, supply distribution shows whether tokens are held by a group of whales or distributed evenly.
If most tokens are held by whales, they can easily move the market. A healthy distribution is when tokens are spread evenly. This indicates a community-driven ecosystem.
Total Value Locked (TVL)
Total Value Locked (TVL) indicates the amount of capital locked in a DeFi protocol. A high TVL signifies high utility and trust.
However, be wary of sudden drops in TVL. This could mean that many traders are exiting their positions or even an sign of exploitation.
Also Read: TVL Crypto: Definition, Function, and The Importance of Total Value Locked in the DeFi World
Exchange Flows
Pay attention to the inflow and outflow of an exchange, as they are crucial for timing transactions effectively.
- High inflow: People are sending coins to the exchange to sell.
- High outflow: Coins are being withdrawn from the exchange to be stored and accumulated.
When used correctly, this metric can serve as a warning before a major pump-and-dump moment.
Market Value to Realized Value (MVRV) Ratio
This ratio indicates whether the market is overvalued or undervalued based on the price paid by token holders. To calculate the MVRV ratio, you only need to know two main components.
MVRV = Market Value / Realized Value
Where
- Market Value = Current price × total supply
- Realized Value = Total value of assets based on the last time they were exchanged on the blockchain.
To interpret the MVRV ratio, the following guideline is commonly used:
- MVRV < 1: The asset is undervalued. This could signal a buying opportunity and potential accumulation.
- MVRV = 1-2: The asset is fairly valued. The market is stable and balanced.
- MVRV > 3: The asset is overvalued. There is potential for correction and price reversal.
Network Value to Transactions (NVT) Ratio
This ratio is dubbed the P/E (Price-to-Earnings) ratio in the crypto world and is used to measure the fair valuation of a digital asset.
NVT = Market Cap / On-chain Transaction Volume
If the NVT value is high, the token is overvalued because the market value is much greater than the transaction activity on the blockchain. Conversely, if the NVT value is low, the token is undervalued compared to its usage.
To assess the NVT ratio, the rule of thumb is:
- NVT > 150: High potential for overvaluation, especially for Bitcoin.
- NVT = 50-150: Normal price range depending on market conditions.
- NVT < 50: Potential for undervaluation, especially when accompanied by high organic transaction volume.
Spent Output Profit Ratio (SOPR)
SOPR is a metric to see whether tokens being transferred are in a state of profit or loss.
SOPR compares the fiat value of a coin when it was first created with the fiat value when the coin is finally sold. If the value is higher when transferred, it means the coin holder is making a profit. If the value is lower, they are selling at a loss.
SOPR = Sell Price / Cost Basis
To determine whether a coin is profitable or not, this benchmark is used:
- SOPR > 1: The owner is selling at a profit.
- SOPR < 1: The owner is selling at a loss.
- SOPR around 1: Break-even condition. Neither profit or loss.
Dune Analytics
- Dashboard and Query: Users can create SQL queries from blockchain data and visualize them as charts in a customizable dashboard.
- Collaboration: Users can view and share other people's queries and dashboards, fork them, and create their own dashboards.
- Extensive Blockchain Support: Dune Analytics supports data from Ethereum, Bitcoin, Polygon, BNB Chain, Solana, Arbitrum, Avalanche, and various other blockchains.
- Wallet Activity Tracking: Users can use Alchemy's Transfer API feature to track wallet activity.
Coin Metrics
- On-chain Analysis: Users can access transaction volume data, network hash rate, and other important metrics for Bitcoin, Ethereum, Ripple, Litecoin, and various other blockchains.
- Real-Time Data Updates: CoinMetrics continuously monitors blockchain activity and updates its database in real-time.
- Customizable Dashboards: Users can customize their dashboards with their preferred analysis tools.
- API Access: Developers can integrate blockchain data into their applications and workflows.
- CoinMetrics Index: Records the 10 largest cryptos based on market capitalization.
Glassnode
- On-chain Analysis: Glassnode metrics include transaction-based data (such as SOPR) and blockchain-based data (such as hash rate metrics).
- Derivatives Market Data: Not only does it track on-chain data, but users can also access detailed data on derivatives.
- Data Visualization: Glassnode Studio offers a range of charts and graphs showing real-time market data for Ethereum, Bitcoin, and DeFi networks.
- API Access: With the Glassnode API, individuals and companies can access a wide range of on-chain and derivatives data.
CryptoQuant
- On-chain Analysis: Supports on-chain data analysis for Bitcoin, Ethereum, and other ERC-20 tokens.
- Future Trading Market Analysis: CryptoQuant visualizes future trading market data, including aggregate open interest, funding rates, buy/sell ratios, and more.
- API Access: Users can utilize data from CryptoQuant for various other tools and even use it to develop their own blockchain analysis software.
- Notification Bot: CryptoQuant sends notifications to email or Telegram when there are shifts in certain metrics.
The Block
- Extensive Market Support: The Block supports spot market analysis, futures trading, ETFs, sports tokens, and more.
- Data Analysis: Supports in-depth on-chain data analysis for Bitcoin, Ethereum, Solana, Polkadot, Aptos tokens, and many more.
- Insights and Reports: Users can access analysis and insights on real-world asset tokenization, derivatives, exchange data, restaking, lending, TVL, NFTs, and more.
- Alternative Metrics: The Block offers a variety of alternative metrics, such as website traffic, app usage, and social metrics.
Coinglass
- Crypto Futures Data: Coinglass provides comprehensive data and analysis for the crypto futures trading market, including Bitcoin liquidations, funding rates, and more. This data is sourced from major exchanges, such as Binance, OKX, FTX, and Dydx.
- Coinglass Notifications: Users can set alerts for price changes in their favorite cryptocurrencies.
- Comprehensive Data: Coinglass supports on-chain data analysis for over 1000 cryptocurrencies. The data provided includes current prices, long and short positions, market cap, volume, and more.
- Portfolio Tracking: Coinglass enables users to monitor selected assets and track portfolio performance.
How to Read On-Chain Data
After learning what on-chain data is and its important indicators, it is time to learn tips on how to read on-chain data correctly.
Pay Attention to Context
A sudden increase in inflows or outflows can have many meanings. Always remember to dig deeper into the reasons behind the data you find.
Find Confluence
When analyzing on-chain data, wait until several metrics point in the same direction. For example, an increase in the number of active addresses accompanied by an increase in transaction volume and high outflows.
Beware of False Signals
On-chain data is not always accurate. For example, sometimes exchanges move assets internally. Blockchain activity can also be inflated by bots.
Avoid blindly trusting the data on the blockchain. Look into the source and cause whenever possible.
Combine with Technical and Fundamental Analysis
On-chain data analysis is very impactful, but don't neglect fundamental and technical analysis. Wise traders combine all three techniques to get the most complete picture.
Common Mistakes in On-Chain Data Analysis
On-chain data helps traders in making decisions, but there are still many common mistakes made when analyzing on-chain data.
- Over-reliance on on-chain data: On-chain data analysis should be part of a trading strategy, not the sole basis for decision-making.
- Ignoring fundamental analysis: Always consider the overall context and external factors that could affect the market.
- Lack of patience: On-chain data analysis requires patience and a long-term perspective. Avoid making hasty decisions based on short-term fluctuations.
Conclusion
Just like any other analytical skill, the ability to analyze on-chain data must be honed through continuous practice and learning. With this skill, you will become a trader who can take advantage of every new opportunity that arises.
On-chain data analysis is one of the key factors in developing a sound trading strategy. However, technical and fundamental analysis are equally important. Learn both of these analysis techniques in the article Crypto Analysis for Beginners: Fundamental vs Technical.
