Use on-chain analytics for more informed cryptocurrency investing
One of the biggest challenges any investor faces is staying calm in the midst of market turbulence. This is especially true for those invested in digital assets such as cryptocurrencies or NFTs. Striking growth in the prices of both has come with far greater volatility than in stock or bond markets, and anyone investing in the world of digital assets must 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? As with any asset, a simple rule applies: buy low and sell high. However, with digital assets, the forces that shape the market are not always the same as those that move traditional financial markets. Bitcoins and Bored Apes are fundamentally different from a share of Apple or ownership of an ETF representing the S&P 500, and savvy investors must understand that the mainstreaming of crypto-investment has been accompanied by the development of new metrics and ways of evaluate the future price trajectory of digital assets.
The use of on-chain analytics when choosing cryptocurrency investments can be critical, as it allows investors to analyze the data available on a blockchain itself to determine a particular cryptocurrency’s market liquidity, transaction volume, distribution on assess different scholarships, and more.
What is on-chain analytics and why is it important to consider when making cryptocurrency investment decisions?
Before explaining what on-chain data analysis is, 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 analytics 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 what make blockchain technologies unique. When you transfer a cryptocurrency to another person on the chain, the transaction is registered and verified by all other participants in that blockchain.
Conversely, off-chain transactions are those that “occur anywhere outside the blockchain”. The most common type of off-chain transactions take place on crypto trading platforms, such as 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 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 a valuable source of data for savvy crypto investors who can analyze trends and trends in the gold mine of data that can be found on the blockchain. On-chain transaction data can tell you who is trading a cryptocurrency, how often it is traded, how much is traded, and more.
How does on-chain analysis work?
Three of the most commonly used metrics for on-chain analysis are:
Crypto Market Cap:
In a blockchain network, the market capitalization of a cryptocurrency represents its net worth. The total value of the network is calculated by multiplying a crypto’s price by the total circulating supply. If there are 100 Hypothetical Coins in circulation, and coins sell for $10 each, the market cap of HypotheticalCoin is $1,000.
Besides calculating the net worth of the network, market cap 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 price fluctuations are likely to be less volatile than a less frequently traded coin.
HODL status:
HODL (Hold On for Dear Life) wave is a measure used by analysts to determine patterns of holding or selling a given cryptocurrency and to understand how long individual users hold their tokens. Investors can find out if 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 HODLing a crypto is significant, this 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 rise if demand remains constant. In addition, it also indicates that the asset will do well in the future.
Source: Bitcoin Magzine Bitcoin HODL waves
Network Value to Transaction Ratio:
Network value-to-transaction ratio (NVT) compares the value of a blockchain network to the volume of transactions that occur on that network. A higher ratio means more transactions are occurring relative to the size of the blockchain, indicating greater user interest and activity.
NFT Analysis:
Although on-chain data for NFTs is not readily available in the way that on-chain data is for Bitcoin, Ethereum, or any 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 rapidly into the new era of NFTs on- and off-chain, AI and data-driven platforms like Defy Trends will release more in-depth NFT analysis tools.
How can I obtain on-chain data?
If you want to do the on-chain analysis yourself, you need to run a node to collect on-chain data for a cryptocurrency. By running a node, you keep and store your copy of the ledger. In addition, you ensure that your transactions are broadcast to other nodes, which transmit the information to ensure that all the consensus rules of the blockchain are followed.
However, the amount of effort, time and money required to execute, store and maintain all the transactions on a blockchain is 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 trouble of collecting and analyzing on-chain and off-chain data.
Using both on-chain and off-chain data analytics can help even the newest investor in the DeFi space make wiser decisions, but with all investments, it’s always wise to work with a licensed, professional.
Happy Hodling!
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Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
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