Back

studBit

10 min read

0

ON-CHAIN ANALYSIS

On-chain analysis is a relatively new field that involves examining the underlying data and fundamental factors of cryptocurrencies to make informed investment and trading decisions. This type of analysis relies on information that is publicly available on the blockchain and is unique to cryptocurrency trading.

The key idea behind on-chain analysis is that the blockchain contains a wealth of information that can be used to make more accurate predictions about the future price movements of cryptocurrencies. This information includes things like transaction volumes, the number of active wallets, and the amount of cryptocurrency held by large investors.

The applications of on-chain analysis are particularly promising for traders who are looking to take advantage of the volatile nature of cryptocurrency markets. By using on-chain analysis, traders can gain a unique perspective that is impossible to achieve with traditional market analysis. This can provide them with an edge in the market and help them make more informed investment decisions.

On-chain analysis deals with the whole data the blockchain gives you. Cryptocurrency is the first asset class where investor activity can be extracted from massive data sets through each crypto-asset’s public ledger, which captures every on-chain action in history.

Since blockchains are a treasure trove of open, incorruptible financial data, we can pinpoint measures of economic activity in these networks. Through the collection and study of this data, we can measure sentiment and investor behavior.

By analyzing this data, we can extract measures of economic activity within the network, as well as investor sentiment and behavior. For example, by examining transaction volumes and the number of active wallets, we can gain insights into how much interest there is in a particular cryptocurrency and how many people are actively using it.

On-chain analysis is a fundamentals-driven approach to analyzing cryptocurrencies, which is focused on examining the underlying data and factors that determine the value of a particular cryptocurrency. This is in contrast to other approaches, such as sentiment analysis or technical analysis, which may be based more on market trends or hype.

One of the key advantages of on-chain analysis is that it allows us to separate the speculative value of a cryptocurrency from its utility value. Speculative value refers to the perceived value of a cryptocurrency based on hype or market sentiment, while utility value refers to the actual usefulness of the cryptocurrency and its ability to solve real-world problems.

By examining factors such as user adoption and miner activity using blockchain data, we can gain insights into the true utility value of a cryptocurrency. This can help us to determine whether the current price is justified by the fundamentals or whether the market is overvaluing or undervaluing the cryptocurrency.

On-chain analysis can also be used to compare different cryptocurrencies and identify undervalued or overvalued coins. By examining historical trends and comparing the on-chain data of different cryptocurrencies, we can identify those that may be undervalued or have strong potential for growth.

NETWORK VALUE TO TRANSACTIONS (NVT) RATIO — THE P/E RATIO OF CRYPTO

The Network Value to Transactions (NVT) ratio is often referred to as the P/E ratio of crypto, as it is a metric that measures the relationship between the value of a cryptocurrency network and the economic activity taking place on that network.

The Network Value to Transaction (NVT) ratio is one of the first and most widely used on-chain metrics for cryptocurrencies. It was popularized by Coin Metrics and is used to determine the utility value of a cryptocurrency by comparing the value of the network with the volume of transactions recorded on the blockchain.

The NVT ratio can help investors and traders determine whether a cryptocurrency is overvalued or undervalued. When the value of the network is not justified by the volume of transactions, the NVT ratio will be unusually high. If the network value is unusually low but the volume of transactions is high, it might mean the blockchain should have a higher valuation. This is where following the project and its investors on platforms like Twitter can be helpful in assessing the overall health and potential growth of the project.

A high NVT ratio indicates that the market value of a cryptocurrency is relatively high compared to the value of economic activity taking place on the network, which may suggest that the cryptocurrency is overvalued. Conversely, a low NVT ratio may indicate that the cryptocurrency is undervalued.

Researchers have iterated on the NVT ratio and made improvements to the metric to make it a more accurate assessment of whether the network value is justified by the economic activity taking place on the blockchain. By using a variety of on-chain metrics, investors and traders can gain a more complete picture of the health and potential growth of a cryptocurrency, which can inform their investment decisions.

REALIZED CAPITALIZATION / REALIZED VALUE

While market capitalization is a commonly used metric in traditional stock markets to measure the size of a company, it is an inexact and misleading measure for cryptocurrencies. Market capitalization is widely used by many comparison websites to rank cryptocurrencies. But since cryptocurrencies are more similar to money or commodities (rather than a company stock), market capitalization is an inexact and misleading measure.

Market capitalization includes all coins in circulation multiplied by their current market price, regardless of when they were acquired. This means that it is influenced by short-term price movements and can be misleading in terms of assessing the underlying value of a cryptocurrency.

Market capitalization ranks can be gamed through different methods of issuance - for instance, a token can be created with a circulating supply of 1 trillion and a few coins sold at $1 means the market cap is $1 trillion - but the coin could only have a trading volume of $3.

As a result, realized capitalization is a metric that emerged as a way to address the drawbacks of market capitalization, which can be gamed through different methods of issuance. Realized capitalization takes into account the actual economic activity on the blockchain and provides a more accurate representation of the true value of the network.

Realized capitalization is calculated by aggregating all UTXOs on the blockchain and assigning a price based on the last time they were moved. This provides a more accurate picture of the network’s value, as it takes into account the actual economic activity and the price at which each unit of cryptocurrency was last transacted.

UTXO stands for Unspent Transaction Output. It refers to the individual units of a cryptocurrency that are held in a particular wallet or address. When someone receives a payment in a cryptocurrency, the transaction creates a UTXO in their wallet. This UTXO represents the amount of cryptocurrency that the user has received in the transaction, and it can be used as an input in a subsequent transaction. When a user wants to spend their cryptocurrency, they create a new transaction that specifies the UTXO(s) they want to use as inputs, and the recipient address(es) to which the remaining cryptocurrency will be sent.

Each UTXO has a certain value, which is the amount of cryptocurrency that it represents. UTXOs are important for the security and privacy of a cryptocurrency network, as they allow for fine-grained control over the transfer of funds and prevent double-spending. In addition, UTXOs are an important aspect of on-chain analysis, as they can provide insight into the distribution and movement of funds within a cryptocurrency network. By analyzing the UTXO set, researchers can track the movement of funds between wallets and addresses, and identify patterns of behavior among users.

Ethereum uses an account-based model, which means that instead of tracking UTXOs, it keeps track of account balances. In other words, the Ethereum blockchain keeps track of how much ether each account holds rather than tracking the history of each individual coin. Because of this, realized capitalization cannot be calculated in the same way as it is for Bitcoin. Instead, researchers have developed other metrics for Ethereum (EVM) that take into account the account-based model. One such metric is called Realized Value, which takes into account the age of each unit of ether in circulation and the price at which it was last moved.

Realized Value is a metric used in on-chain analysis that attempts to provide a clearer picture of the market value of a cryptocurrency network. It takes into account the price at which each unit of cryptocurrency was last transacted, rather than using the current market price. Realized Value can be calculated by multiplying the number of units of cryptocurrency that have been transacted at a certain price by that price. This provides a measure of the market value of the cryptocurrency network that is based on actual transaction prices, rather than just the current market price.

Realized Value can be useful in determining long-term trends in the market value of a cryptocurrency network, as it is less influenced by short-term price fluctuations. It can also be used to identify potential overvalued or undervalued coins, as well as to compare the market values of different cryptocurrencies more accurately. Realized Value is similar to Realized Capitalization in that it aims to provide a more accurate assessment of the value of the Ethereum network based on the economic activity taking place on the blockchain.

Realized capitalization and realized value can be used in on-chain analysis to provide a more accurate understanding of the true value of a cryptocurrency network, based on the economic activity taking place on the blockchain. For example, if the realized capitalization or realized value of a cryptocurrency is significantly higher than its market capitalization, it could indicate that the cryptocurrency is undervalued and may present a buying opportunity.

On the other hand, if the market capitalization of a cryptocurrency is significantly higher than its realized capitalization or realized value, it could indicate that the cryptocurrency is overvalued and may present a selling opportunity. Additionally, tracking changes in realized capitalization and realized value over time can help identify trends in user adoption and economic activity on the blockchain, which can provide valuable insights into the long-term potential of the cryptocurrency. It is important to note that realized capitalization and realized value are just two of many on-chain metrics that can be used in on-chain analysis. Traders and investors should also consider other metrics.

NUMBER OF ACTIVE ADDRESSES AND THE NUMBER OF TRANSACTIONS

The number of active addresses and the number of transactions are two important on-chain metrics used in cryptocurrency analysis.

The number of active addresses is a useful on-chain metric that can provide insight into the level of adoption and usage of a particular cryptocurrency. The metric tracks the number of unique addresses that have been active in sending or receiving transactions within a specific time period. Active addresses can be seen as a measure of network participation, with a higher number of active addresses indicating a more active and engaged user base.

The number of active addresses can be used to analyze trends in the adoption and usage of a cryptocurrency over time. For example, if the number of active addresses is increasing over time, it may suggest growing interest in the cryptocurrency and a broader user base. On the other hand, if the number of active addresses is decreasing, it may indicate a decline in demand or a shift in user behavior. However, it is important to note that the number of active addresses does not necessarily reflect the number of unique users. A single user can have multiple addresses, and multiple users can share the same address.

The number of transactions is a crucial metric that provides insight into the overall level of economic activity within a cryptocurrency network. It represents the total number of transactions recorded on the blockchain within a specific time period. Transactions can be either a transfer of cryptocurrency from one address to another, or the execution of a smart contract.

High transaction volumes may indicate a high level of demand for the cryptocurrency and suggest that it is being used for real-world transactions. This is because when more people are using a cryptocurrency for transactions, there will be more transactions recorded on the blockchain. On the other hand, low transaction volumes may indicate less adoption and less economic activity, which can have a negative impact on the value of the cryptocurrency.

Moreover, the transaction volume can also provide information about the scalability of a blockchain network. If the transaction volume is increasing rapidly but the network cannot handle the volume, it may result in higher transaction fees, longer confirmation times, and other issues. Conversely, a blockchain network that can handle high transaction volumes without experiencing delays or high fees is considered to be more scalable and may be more attractive to users.

The number of transactions is a key metric to watch when analyzing the health and adoption of a cryptocurrency network. It can provide valuable insights into the level of demand, usage, and scalability of the network. Both metrics can be used to identify trends and potential trading opportunities. For example, a significant increase in the number of active addresses and transactions may indicate that a cryptocurrency is gaining popularity and could be a good investment opportunity. Conversely, a decrease in these metrics may indicate that a cryptocurrency is losing popularity and could be a risky investment.

It’s important to note that correlation does not always imply causation. While a rise in active addresses and transaction volume may be a good sign for the price of a cryptocurrency, there could be other factors at play that affect the price as well. For example, news events or changes in regulations can also impact the price of a cryptocurrency. Therefore, it’s important to consider multiple factors when analyzing the price movements of a cryptocurrency.