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How Can On-chain Analysis Help Cryptocurrency Traders?

The development and application of these ideas are promising for traders who want to leverage public blockchain information, with the potential to enhance their trading strategies and position management.

Perhaps the most dominant form of analysis in cryptocurrency trading is the study of price action, i.e., technical analysis. But utilising the wealth of information provided by public blockchains like Bitcoin and Ethereum can provide a unique perspective that is impossible for traditional assets and can complement other analyses.

What is On-chain Analysis?

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 behaviour.

On-chain analysis is a fundamentals driven approach rather than based on hype, sentiment or technical analysis. This type of analysis can be focused exclusively on one crypto-asset by looking at historical trends or can be used to compare different crypto-assets to identify undervalued/overvalued coins.

We can think of the actual value of a cryptocurrency like BTC as made up of two parts: speculative value and utility value. On-chain analysis is a vital tool that helps you separate the speculative value of a cryptocurrency from its utility value. By examining, for instance, user adoption and miner activity using blockchain data, we can see whether the current price is justified by the fundamentals.

A Brief History of On-chain Analysis

On-chain analysis can trace its history back as far as 2011, when coin days destroyed was created as a valuation metric for bitcoin and was the first indicator to make use of the age of bitcoin addresses. Continue on

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