Table of Contents
ToggleEnglish فارسی (Persian) Türkçe (Turkish)
On-Chain Analysis is an emerging type of analysis in the digital currency market that examines the transaction activity of a token, its blockchain data, and investment principles. Such crypto is one of the perfect methods of analysis in the cryptocurrency market, based on which the investment and trading activities of cryptocurrencies can be analyzed and extracted from the relevant general ledger.
In fact, such or intra-chain analysis in the digital currency market to analyze and predict cryptocurrency price fluctuations examines data such as the amount of network activity, transactions, transaction volume, and other information related to the block chain of a cryptocurrency. Such analysis and signal is used only in this market due to the decentralized nature of the cryptocurrency market.
The foundations of the analysis of such Bitcoin and other cryptocurrencies are based on the transparency of information in blockchain networks. Users in blockchain networks have access to updated versions of information. In this way, they can analyze all the data without any reduction or manipulation.
Based on the data available in the blockchain network, users will be able to gain a correct understanding of the behavior and feelings of other investors. If you are also one of the investors interested in market analysis, in the rest of this article, stay with me, Farhad Moghadam Salimi, to learn more about Anchin On-Chain analysis and Anchin analysis site, etc.
What is on-chain analysis?
On-Chain Analysis is one of the digital currency market analyzes that includes the evaluation of investment principles, blockchain data of a token, and its transaction activity. Analysts in the cryptocurrency world are trying to enhance their understanding of a network by analyzing various metrics. This has made it possible to predict the price movements of a currency and for this reason, investors can make more profitable choices.
In a simple expression for teaching such analysis, such signal can be considered an efficient and powerful tool to achieve more profit in the Nordic and distant future.
On-chain data evaluation includes useful information available in blockchain networks;
This information includes items such as;
- Price correlation of digital currencies
- Number of new active addresses
- The volume of transactions
- Transaction fees
- Inputs and outputs of different digital currency markets
- Checking details such as miners' rewards and...
For example, in analyzing the analysis of Bitcoin (BTC), it is possible to evaluate the quality of miners’ activity and the level of acceptance by investors. Finally, by examining some important indicators, we can recognize the value trend of the market price. Just as it is important in the fundamental analysis of a stock to better understand the value of a company in the stock market, such analysis is also used for the valuation of various networks.
Read more: Fundamental Analysis
Download the technical analysis book
the writer: Thomas Myers
Translation and adaptation: Farhad Moghadam Salimi
Combining the analysis of China with other analytical tools
By combining such analysis and technical analysis, investors and traders determine appropriate entry and exit points and trading strategies for their digital assets. In fact, one of the main advantages of this on-chain analysis is the use of data related to available transactions and wallets in order to understand the value of a blockchain network and analyze the behavior of traders in a cryptocurrency market. Due to this feature, the profit-seeking advertisements of abusers are ineffective and users are able to take steps towards profitability with real analysis.
Attention: Technical analysis without fundamental analysis will be an incomplete analysis. Therefore, it is suggested not to rely on the results of this analysis alone for investment.
How On-Chain Analysis Works
One of the advantages of the cryptocurrency market over traditional markets is its greater predictability. Although the cryptocurrency market fluctuates a lot and one news can change all strategies, investors still have the possibility to predict the market based on charts with analytical tools, regardless of external events.
Technical analysis examines the behavior of the chart using past data such as volume of transactions, price and its changes, etc. Fundamental analysis also calculates the value of an asset based on social and economic factors affecting it. But such analysis includes various measures of a cryptocurrency's price performance.
For example, one of the important information that traders get with such analysis is the activity of whales (big market investors); that these data can determine the movement trend of the cryptocurrency market.
On-chain information basically includes information related to all transactions in the public blockchain network. For example, details related to transactions such as miners’ fees, fees, bonuses and smart contract codes, etc. are. Checking such on-chain data is often based on three main characteristics and works according to them. These three important characteristics include the following:
Cryptocurrency holding status (Hold)
Digital currency market analysts always use a measure called HODL wave to determine the future of a cryptocurrency. The hold wave actually indicates whether traders are holding a currency or selling it quickly. By examining the hold wave, we can understand that the future of a cryptocurrency will face an increase or decrease in price; Therefore, examining traders’ feelings about holding or selling cryptocurrencies is one of the important indicators of such analysis.
The market value of a cryptocurrency
The market value of a cryptocurrency actually represents the net worth of the blockchain network of that cryptocurrency. On the other hand, the total value of a network is always obtained from the product of the price of cryptocurrency and its total supply. In addition, with the market value, it is possible to identify the related risks and the level of acceptance of cryptocurrency among users.
Future vision of a cryptocurrency
Predicting the future of a digital currency market relatively is very important for the analyst to understand whether a digital currency will become popular among investors or not. Traders can achieve this prediction by considering factors such as the evaluation of the price of the Bitcoin token , the price correlation between the tokens, and the interpretation of the input and output of transactions.
Comparing the value of an altcoin with the price of Bitcoin can determine whether this cryptocurrency has the ability to grow or not; This analysis can reduce the possibility of financial and investment risk . On the other hand, by checking the input and output of tokens, analysts can check their acceptance status and use such a signal as a warning signal.
How does teaching such analysis help traders?
In such analysis, analysts delve deeply into the data and what is happening in the market. As the blockchain network is like a distributed ledger in which all transactions of the digital currency world are recorded;
In-chain analytics is also about studying and examining that data to understand who is doing what at what time and place. Data analysis helps traders identify patterns and trends in the market. But beyond that, data also helps traders discover hidden trends, patterns that most people are unaware of. In this way, by putting the clues together, you can get a general view and a deep understanding of the future behavior of the market.
In general, the two main cases of the use of such data and the importance of teaching such analysis include the following;
Forecasting market movements in the future
By participating in the network at any time and monitoring investor behavior, analysts can predict future market movements by enhancing trading strategies. For example, by considering the number of active addresses in the transactions of a digital currency, the amount of increase or decrease in demand and supply for that currency can be reached in the future.
Studying the behavior of investors
On-chain analysis metrics provide the details of investors’ behavior. Analysts look at the length of time an address has held a cryptocurrency. As the number of investors holding a digital currency increases, the circulating supply of that cryptocurrency will decrease. This shows that there is a possibility of increasing the demand for that cryptocurrency. Beyond that, the future of the corresponding cryptocurrency will be predicted optimistically.
The difference between on-chain and off-chain transactions
In Off-Chain transactions, the agreement of the parties is based on the fact that a third party will receive and provide the desired digital asset. In fact, Offchain transactions are done using digital currency wallets and special codes and are not registered within a network or within a chain. Off-Chain transactions are not registered and executed on the network, and it is not possible to follow up in case of any problems.
On the other hand, such transactions that are within the chain, despite being long, will have special validity. Also, in order to transfer and perform transactions on the blockchain network, a fee must be paid; This is despite the fact that there is no such requirement in Afchain’s activities.
In the blockchain network, there are various ways to perform off-chain or off-chain transactions, such as exchanging the wallet’s private key to another person and transferring its ownership to him. To better understand the difference between these two transactions, imagine that you are going to buy a car. Now, if you want to purchase the car through personal purchase instead of buying from the company, your transaction will be done very quickly without paying the commission of the company;
However, due to the lack of proof and document of your ownership, there is no credit in this transaction. By making such transactions, you will have access to transparent data, which will be the basis for such analysis; Because all the details related to the transactions will be registered and available in the blockchain.
What is the purpose of in-chain analysis?
As you can imagine by now, investors use this analysis to make smart decisions. In general, the purpose of using on-chain analysis can be interpreted in the following four cases:
- On-chain analysis to measure the strength of the blockchain network
- Achieving reliable criteria to evaluate the price of Bitcoin
- Success in trading by combining it with expert analysis
- Analysis to identify the buying and selling range
Review such data in transactions
To get the most out of on-chain analysis, you must have access to up-to-date information. If you are an active investor in the cryptocurrency market, consider the following indicators in gathering information:
- Active addresses of digital currency wallets
- Turnover
- Hash rate
- Miner's income
- Determining the value of stocks and assets with the NVT index
- Stock to Flow model
Such analysis indicators
To analyze intra-network activities and transactions, there are a series of indicators and criteria, each of which is categorized into specific sections depending on the area under investigation.
In-chain analysis criteria to measure network strength
The following indicators provide a view of how a network’s monetary policies work and the level of usage and security of the blockchain network .
Active Addresses
The index of active addresses does not actually represent the number of active users on the network; But it can show the number of addresses used by miners, exchanges and individuals. The number of active addresses in the long term has a direct correlation with the price.
Daily Issue
The total amount of new tokens awarded to miners and stakers per day as a reward is called daily issuance. This on-chain analysis index shows the correct performance of a network’s monetary policy.
Trading Volume
Transaction volume shows the amount of digital currency exchanged between addresses and is usually measured in fiat currencies.
Supply Distribution
Supply distribution actually determines the percentage of coins held by address. This index shows the distribution rate of a currency among users. For example, the number of addresses containing more than 10,000 bitcoins has decreased over the last few years, while the number of addresses containing less than 10 bitcoins has increased.
Hash Rate
The amount of processing power produced by miners to ensure blockchain security is evaluated by hash rate. In fact, the higher the hash rate, the more secure the blockchain will be.
Miner Revenue
Miners’ income includes fees and the total set of tokens paid to them. High income guarantees the security of the network and motivates miners to continue to protect it and receive rewards.
Intra-chain criteria to evaluate the scope of purchase and sale
In addition to the mentioned indicators that represented the health of the network; Below I mention some of the on-chain metrics that will show the short- and medium-term performance of the digital currency market. These indicators show how much cryptocurrency exchanges, miners, and traders have at their disposal. Also, by examining these criteria, you can find out the amount of their profit and loss.
For example, with the increase in the number of tokens stored in exchanges, it can be interpreted that many investors had high profits in the last six months; In simpler words, after experiencing good profitability, investors are now selling and the impact of these events can be observed. Below I mention the necessary indicators to analyze the buying and selling range:
CDD index
The Coin Days Destroyed or CDD indicator means the number of days a cryptocurrency is held. This analysis measure shows the circulation time of a currency. An increase in the CDD indicator indicates that holders of a cryptocurrency hold it for a long time and then sell it for profit. For example, if 0.01 Bitcoin is kept in a wallet for 250 days, its CDD index will be equal to 25 (0.01 x 250).
Realized Profits and Losses
Realized profit and loss is a metric in analysis used to measure the dollar value of Bitcoin sold at a profit or loss. For example, if you consider the purchase price to be $10,000 and the method to be $50,000, the resulting profit will be $40,000.
Supply on profits and losses
This analysis measure shows the number of coins in profit or loss compared to their last purchase price. For example, in a bullish market, cryptocurrencies will be more profitable than possible losses.
Realized Cap Index
The real value measure will be obtained by multiplying the number of tokens by their current price and will be compared with the market value of a cryptocurrency. As the Realized Cap measure increases from the market value, we will see profit in the entire market.
Thermo Cap model
This model of on-chain analysis is a benchmark for the fundamental valuation of Bitcoin, which is calculated based on the dollar value of cryptocurrency paid to miners. The reduction of thermo cap over time in comparison with market cap shows the supply pressure from miners and its less impact on the price.
On-chain criteria for evaluating the price of a cryptocurrency
During the continuous trading of cryptocurrencies such as Bitcoin, it is necessary to be aware of the events in the market. For example, should the market be cautious in this situation or not? Below are some ratios that will help you understand the short-term trends in the cryptocurrency market:
Market Value to Real Value (MVRV)
In such analysis, the market value is a widely used ratio to the real value. For example, a high MVRV value for Bitcoin historically signals that the price of Bitcoin is approaching a local ceiling. On the other hand, the low MVRV ratio also indicates that the price of Bitcoin is close to the local floor.
Network Value to Transaction (NVT)
Network value to transaction or NVT is actually a ratio obtained by comparing the market cap with the volume of transactions. This indicator in the cryptocurrency market is the closest measure to the ratio of price to income in traditional markets. The overall purpose of NVT is to compare the fundamental value of a digital currency network to its current price. A low NVT value indicates bearish sentiments and vice versa.
Stack to Flow (S2F)
Stock to Flow is a model for predicting the price of Bitcoin. For example, according to the prediction of this criterion, with the continuous increase in the acceptance of the Bitcoin cryptocurrency, its price will reach 1 million dollars by 2025.
Stablecoin Supply Ratio (SSR)
This indicator is between the supply of a cryptocurrency and the supply of a stable coin and actually shows the purchasing power of Bitcoin in the short term.
Limitations and disadvantages of in-chain analysis
On-chain analysis, like other analysis, has disadvantages and limitations in addition to outstanding features. These tools are currently still in the formative stage. Based on the limited history of data, over time and as the industry matures, there is a possibility of emerging new trends and changing these criteria. Below are some of the main limitations of intra-chain analysis:
- Considering that digital currencies have only been introduced for more than a decade; The historical results and analysis available to us, which were created based on current criteria, have an expiration date. Many of our current analyzes are likely to be meaningless in the future and cannot be relied on for a long time.
- Factors such as scalability in networks such as Ethereum and Bitcoin cause changes in the amount of transactions in the layer one network in addition to less transparency of available data. However, we will need more improvements around the data or considering their effects in the layer one network.
- Such analyzes are not suitable for traders who operate in short-term time frames. In-chain analyzes are mainly created with long-term perspectives and do not have any special value for these traders. These types of traders can use this analysis as a supplement for their transaction.
Different models of such analysis
In general, such analysis is divided into the following two models:
Analysis based on the UTXO model
The UTXO model has the same functionality as our everyday accounting. This model states that unspent transactions are actually users’ balances that are updated after each transaction. This issue is the same as if you go to the store with a 100 thousand Toman bill, after buying 50 thousand Tomans, you will receive the rest of your money. This operation takes place in the UTXO model on the Bitcoin blockchain with full security.
Account based analysis
Account-based analysis is most commonly used in networks such as Ethereum. This model is such that users get the value of their investments by having a separate personal account and also recording account inputs and outputs.
The best Anchin analysis site is In to The Block, which analyzes Anchin data and indicators in this field.
This analysis provides useful information for traders and can be the basis of their decisions; But in the digital currency market, nothing can be considered completely reliable.
There are so many analysis criteria and they are added day by day and it is not possible to mention all of them. But among the most important of these indicators, we can mention active addresses, wave hold, and realized profit and loss.