Onchain analysis in simple terms / Habr

Hello there, my fellow crypto enthusiasts! Are you looking to take your trading game to the next level and gain a deeper understanding of market trends and behavior? If so, then onchain analytics is the perfect tool for you.

Onchain analytics is like a crystal ball in the world of cryptocurrency, providing valuable insights into user behavior and market trends. By studying the activity that takes place on a blockchain, you can gain a deeper understanding of market dynamics and make more informed trading decisions.

It’s all about digging deep into the data and finding out what’s really going on. You see, the blockchain is like a big old public ledger that records every single transaction that goes down in the crypto world. And onchain analytics is all about studying that data to find out who is doing what, when and where.

Why does it matter? Well, for one thing, onchain analysis can help you detect trends and patterns in the crypto market. Maybe you notice that a certain wallet keeps buying up large amounts of Bitcoin every time the price drops. This could be a sign that someone with deep pockets is bullish on BTC and trying to collect as much as possible. Or maybe you see a sudden increase in activity on a certain coin’s blockchain. This could be a sign that something big is about to go down, such as a major partnership or product launch.

But beyond the practical benefits, there is something truly exciting about diving into the world of onchain analytics. You will explore the underbelly of the cryptocurrency market and uncover hidden patterns and trends that most people don’t even know exist. It’s a lot like being a detective, gathering clues and unraveling mysteries to gain a deeper understanding of the market.

So, there you have it – onchain analytics in a nutshell. If you like crypto, you should know about this stuff. Now let me break down the benefits of on-chain analysis for you using the example of the most obvious indicators on Bitcoin. If you are familiar with the device of any blockchain at a top level, you will be able to understand how to build the simplest on-chain indicators.

To construct an indicator, you need to explore the entire blockchain, starting from the genesis block, and analyze all transactions within each block in chronological order. This is the basic mechanics of on-chain analysis. It is important to analyze blocks and transactions sequentially. If you do this simultaneously or break the chronological order, it may appear that a certain wallet spends coins without having a sufficient balance.

First, we have transaction volume. This indicator shows the total number of transactions taking place on the Bitcoin blockchain. When the transaction volume is high, it is a good sign that the Bitcoin ecosystem is active and healthy. You wouldn’t want to invest in a dead coin, would you?

To calculate the transaction volume, you need to iterate through each block in the blockchain, examine each transaction within the block, and extract the transaction value, which is the amount of bitcoins sent (or spent).

Next, we have exchange inflows and outflows. This metric measures the amount of Bitcoin moving in and out of exchanges. High inflows may indicate that traders are getting ready to sell their BTC, while high outflows may indicate that traders are buying up BTC and taking it down.

Any transaction is someone’s purchase and someone’s sale.

In our analysis, we are particularly interested in the behavior of the largest wallets, those holding more than 10k bitcoins. Those wallets are called Whales. The term “whale” is often used to describe individuals who own a large amount of cryptocurrency relative to the total supply of that particular asset. Whales therefore have the power to influence the market with their buying or selling activities. We want to investigate a whale’s behavior. To achieve this we must:

Determine the balances of all wallets in each block;

Select only those wallets with balances greater than 10k bitcoins;

Record a purchase if one of these wallets acquires additional bitcoins, or a sale if they dispose of any;

Sum up the inflows and outflows of all major wallets within each block to get a comprehensive view of the overall trends.

Now let’s talk about active addresses. This is where things get interesting. Active addresses measure the number of unique addresses that are actively sending or receiving Bitcoin. When the number of active addresses is high, it means that there is a strong user base and healthy adoption of Bitcoin. And this is exactly what you want to see if you are bullish on BTC.

Determining the number of new wallets in the system is a simple process. Simply repeat all blocks and transactions, but this time focus on identifying wallets that appear for the first time. Increase a counter by +1 for each new wallet you encounter. If you come across a wallet you’ve seen before, just skip it and move on to the next one.

Last but not least, there are UTXOs. UTXO stands for unspent transaction output. Basically, this is the total number of Bitcoin that have not been spent yet. By analyzing UTXOs, you can gain insights into the amount of liquidity available and the behavior of Bitcoin hodlers. And this is valuable information for any savvy crypto investor.

UTXOs are bitcoins that remain in a wallet after a transaction is made. Essentially, it’s the deal leftover. To better understand UTXOs, consider this example: Alice has 5 bitcoins in her wallet and wants to send 1 bitcoin to Bob. To do the transaction, Alice tells Bob to take all 5 bitcoins, keep 1 for himself, and return the remaining 4 to her wallet. It may seem strange compared to traditional currency, where you usually only spend what you need, but in Bitcoin the remaining coins become UTXOs. We can trace UTXOs by examining the balances of wallets that have made transactions.

To build these indicators for the entire blockchain, we need to automate the process of extracting data from the blockchain and performing the necessary calculations.

Extracting data from blockchains like Bitcoin or Ethereum can be a daunting task, especially if you are new to onchain analytics. Here are some of the problems you may encounter along the way:

Blockchain size: Both Bitcoin and Ethereum are constantly growing, which means that the size of the blockchain data is constantly increasing. This can make it challenging to store and analyze large amounts of data.

Lack of standardization: Although there are many tools and resources available to retrieve data from blockchain, there is no standardization across these tools. This can make it challenging to compare data across different platforms and sources.

Technical expertise: Extracting data from blockchain requires a certain level of technical expertise, especially if you plan to build your own tools or applications. This can be a barrier to entry for those new to onchain analytics.

There are many tools and resources available that can help you retrieve and analyze data from the Bitcoin and Ethereum blockchains. These include blockchain explorers, onchain analytics platforms, APIs, and even open source libraries and tools you can use to build your own applications.

If you are new to onchain analytics, I recommend starting with a user-friendly blockchain explorer or onchain analytics platform, such as Blockchair, Etherscan, or Coinmetrics. These platforms provide access to a wealth of blockchain data in a structured and organized format, making it easy for you to explore and analyze the data.

In the following sections, I will outline one of the easiest ways to perform onchain analysis at home and teach you to build those 4 indicators listed above using Python.