Understanding on-chain analysis to make more informed digital asset investment decisions.
One of the greatest challenges facing any investor is remaining calm amidst market turbulence. This is especially true for those invested in digital assets like cryptocurrencies or NFTs. Eye-popping growth in the prices of both have come with far greater volatility than in equities or bonds markets, and anyone investing in the world of digital assets should understand that volatility is the name of the game.
How can a crypto investor navigate the turbulent ups and downs that come from crypto markets? Like with any asset, a simple rule applies: buy low and sell high. With digital assets, however, the forces shaping the market are not always the same as those moving traditional financial markets. Bitcoins and Bored Apes are fundamentally different from a share of Apple or ownership of an ETF that represents the S&P 500, and savvy investors need to understand that the mainstreaming of crypto investing has been accompanied by the development of new metrics and means of evaluating the future price trajectory of digital assets.
Using on-chain analytics when choosing cryptocurrency investments can be critical, as it allows investors to analyze the data available on a blockchain itself to assess a particular cryptocurrency’s market liquidity, transaction volume, distribution on different exchanges, and more.
What is on-chain analysis and why is it important to consider when making cryptocurrency investment decisions?
Before explaining what on-chain data analytics are, it is necessary to understand what on-chain means. It refers to cryptocurrency transactions, which can take place on the blockchain or through third party platforms or exchanges.
On-chain and off-chain data analysis platform, Defy Trends recently defined on-chain analytics in simple terms:
“On-chain literally means that the transaction took place on the blockchain. On-chain transactions are essentially the thing that makes blockchain technologies unique. When you transfer a cryptocurrency to another person on the chain, the transaction is registered and verified by all other participants on that blockchain.
Conversely, off-chain transactions are those that “take place anywhere off the blockchain. The most common type of off-chain transactions occurs on crypto trading platforms, like Coinbase and Binance. Trading platforms do not necessarily have to own the crypto they “sell” to the user; instead, they keep a private record of what the user bought, if the user wants to convert to cash, or if they want to move the crypto off of the platform.” Imgesu Cetin CEO and Founder, Defy Trends
On-chain can also refer to the process of storing data or managing data on the blockchain, but the term is generally used to refer to on-chain transactions. On-chain transactions provide an invaluable source of data for savvy crypto investors who can analyze trends and tendencies in the goldmine of data to be found on the blockchain. On-chain transaction data can tell you who is trading a cryptocurrency, how often it’s being traded, how much is being traded, and more.
Three of the most commonly used metrics for on-chain analysis are:
In a blockchain network, the market capitalization of a cryptocurrency represents the net value. The total value of the network is calculated by multiplying a crypto’s price by the total circulating supply. If there are 100 HypotheticalCoins in circulation, and coins are selling for $10 apiece, the market cap of HypotheticalCoin is $1,000.
Besides calculating the net worth of the network, market capitalization helps estimate the size of the market for a given token or coin. A larger and more active market indicates broader investor interest, meaning that the fluctuations in price are likely to be less volatile than a less frequently traded coin.
HODL (Hold On for Dear Life) wave is a metric used by analysts to determine patterns of holding or selling a given cryptocurrency and understand how long individual users are holding their tokens. Investors can figure out whether traders are HODLing or selling quickly by analyzing the HODL wave.
HODL wave reflects the mood of the market and the perspective of HODLers, and can be seen to indicate the stability and long-term growth prospects of a token. If the number of investors that HODL a crypto is significant, it may indicate a smaller circulating supply of the cryptocurrency. In this situation, an on-chain analysis tells us that the price of that cryptocurrency should increase if the demand remains constant. Additionally, it also suggests that the asset will perform well in the future.
Source: Bitcoin Magzine Bitcoin HODL waves
Network Value to Transaction (NVT) ratio compares the value of a blockchain network to the volume of transactions taking place on that network. A higher ratio means that more transactions are taking place relative to the size of the blockchain, indicating greater user interest and activity.
While on-chain data for NFTs is not readily available in the way that the on-chain data is for Bitcoin, Ethereum, or a cryptocurrency, there are datasets that record off-chain NFT transactions. A primary example is OpenSea’s NFT exchange data, which OpenSea makes available through its free API. However, as we move quickly into the new era of NFTs on-chain and off-chain AI and data-driven platforms like Defy Trends will release more in-depth NFT analysis tools.
If you want to do the on-chain analysis yourself, you must run a node to collect on-chain data for a cryptocurrency. By running a node, you maintain and store your copy of the ledger. In addition, you ensure that your transactions get broadcasted to other nodes, which relay the information to ensure that all of the blockchain’s consensus rules are followed.
However, the amount of effort, time, and money required to run, store and maintain all the transactions on a blockchain are beyond the means and patience of most individuals and organizations. Fortunately, cryptocurrency analytics companies like Defy Trends, Chainalysis and Messari have emerged to solve this problem for investors. These companies save the users from the hassle of collecting and analyzing on-chain and off-chain data.
Utilizing both on-chain and off-chain data analysis can help even the newest investor in the DeFi space make wiser decisions but with all investments, it is always wise to work with a licensed, professional.
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