How to Analyze Cryptocurrencies Using Onchain Data

The challenge of investing in Crypto

The rapid pace of innovation, constantly shifting narratives and an ever-increasing amount of data points make choosing the right cryptocurrencies for investment extremely challenging. Most investors are familiar with traditional fundamental and technical analysis methods widely used in traditional markets. While these approaches are valuable, the transparency of blockchains introduces an additional layer of analysis unique to the cryptomarkets – onchain analysis.

Every transaction and event on a blockchain is recorded. By leveraging onchain data, you gain a deep understanding of exactly what is happening. On-chain analysis allows you to track the activities of token holders, identify the largest holders, understand transactions and movements related to the token, and much more.

In this guide, you will learn about key onchain data points to look for when analyzing cryptocurrencies. I’m also going to go through an example to showcase the process in action.

Key Onchain Statistics to Evaluate Cryptocurrencies

Not every data point is valuable for making decisions, and without proper context it can lead to wrong conclusions. Often, “whale” transactions that are widely shared and circulated turn out to be simply internal transactions of large exchanges.

To make accurate decisions, investors must focus on finding out who and what.

Who are the top holders Who buys and sells What top holders do What Smart Money does

To explain the key metrics in more detail, let’s dive into a workflow using Pendle as an example.

Top holder balances and distribution

Understanding who the top holders of a token are and the concentration of ownership is crucial, especially for tokens with small to medium market caps.

Here are three insights you can get from analyzing the spread and top containers using PENDLE as an example:

Quality of containers

The quality of token holders often reflects the quality of the project. During the crypto winter, valuations of many crypto protocols fell. Smart investors have used this period to accumulate significant positions in protocols they believe in. For example, the investigation of PENDLE reveals that the Spartan Group and Arthur Hayes are among its top holders, indicating high quality support.

Both started accumulating Pendle 2 to 7 months ago, long before his recent run.

Concentration of ownership

Extreme caution is needed when ownership is strongly concentrated among a few. Such concentration increases the risk of price manipulation by a single entity. For large whales or funds considering a position, understanding the concentration of ownership can guide position size and risk management strategies.

Balance changes

Monitoring top holders’ balance changes provides insight into their outlook on the protocol. Setting up Smart Alerts for top container addresses in PENDLE is an efficient way to track their activity.

However, a decrease in token balance does not always indicate selling. For tokens that offer yield farming opportunities, large holders can stake their tokens to earn yields rather than leaving them idle. Therefore, examining the transaction history of an address is essential to fully understand their actions.

In the case of PENDLE, we see that Arthur Hayes added 500K more tokens over the last 30 days while Spartan Group had a slight drop in their holdings. Diving deeper into Spartan Group’s activity, we see that the tokens were sent to Binance.

Who buys/sells the token

For traders or investors looking for potential entries or exits in cryptocurrencies, two main approaches are of interest:

Using Technical Analysis Copy Trading Strategies of Whales/Smart Money

Getting a quick overview of who bought or sold a token can give you a sense of the general sentiment among key market participants. If you observe a large number of Smart Money addresses selling a token after a significant run-up, this may indicate a good time to lock in profits.

While aggregated overviews provide a high-level understanding of what key wallet addresses are doing, monitoring the live feed of DEX transactions provides real-time insight into how key holders react to announcements or market movements.

In the case of Pendle, we are starting to see selling slightly outperforming buying over the past 7 days as investors hold onto profits. Looking at recent DEX trades, we see a big purchase of ~$70K Pendle, but Apollo Capital is selling.

What holders do with the tokens

Long-term investors often stake their long-term interest to improve their capital efficiency. A high percentage of a particular token being staked is usually a positive indication of holder sentiment towards the protocol’s long-term future. In addition, it reveals which pool holders are participating, and provides insight into the strategies of the most successful investors. For example, a significant majority of Pendle tokens are placed in their vePendle pool.

Smart Money Token Holdings

An increase in Smart Money holdings or in the number of Smart Money holders over time indicates that top investors and traders are optimistic about the project.

Despite a decline in Smart Money holdings from historical highs, there has been a steady rise since July 2023. The number of Smart Money addresses holding the token has returned to previous highs. This gradual increase in total holdings and Smart Money addresses over the past 6-7 months clearly indicates optimism about Pendle’s future.

Summary of analysis

High-quality holders, who accumulated at lower prices, are still holding and even adding to their balances despite the massive run-up. Many holders actively stake their tokens into the vePendle pool. There has also been an increase in the number of top market participants gaining exposure to Pendle. However, market conditions change rapidly, highlighting the importance of consistent monitoring and tracking of these metrics.

Use Onchain data for fundamental analysis

In fundamental analysis, investors analyze 4 main areas:

Quality of the team Review of the white paper Tokenomics User activity growth

Onchain data is critical to gaining a clearer understanding of a project’s growth in user activity. Metrics such as daily active addresses, number of transactions and total value closed (TVL) are all found on chain.

It’s often worth diving deeper into TVL to find out who the top depositors are to determine quality. Using Blast’s contract as an example, we see several Smart Money addresses at the top depositors. This indicates a level of optimism towards Blast, the Layer-2 project linked to the team behind Blur.

Get deeper insight into any sign

While fundamental and technical analysis remain valuable, on-chain analysis provides a competitive advantage by providing insights into major on-chain movements and the activities of other traders, investors and institutions. This deeper understanding of market dynamics can be crucial.

The analysis and workflow described serves as one approach to using on-chain data for token analysis. As you dig deeper and explore further, you will develop your own process and identify specific data points to monitor.

Simply go to app.nansen.ai, press CMD + K and search for any token to start analyzing!