The Value of On-Chain Analysis
The cryptocurrency market fundamentally differs from the traditional financial market, as the issuance and trading of cryptocurrencies utilize Blockchain technology, where all Bit transfers between on-chain addresses are publicly and transparently recorded. Although we cannot directly know the owners behind the addresses, on-chain analysis does not focus on individuals, but rather on the overall market consensus and behavior. By aggregating and analyzing the flow of coins in the market, we can infer current trends and market dynamics through the data.
Learning On-Chain Analysis: A Beginner's Starting Point
For investment beginners, technical analysis is often the first area of contact, but there are many technical analysis schools with high learning thresholds, which can be daunting. In comparison, on-chain analysis is a more suitable starting point for beginners. Its data observation level is relatively large, starting at least from the daily line, which is suitable for the investment group that cannot monitor the market for a long time. This feature not only reduces the need for frequent operations, but also fits well with investment beginners who need to "look more and do less", as well as office workers who do not have enough time for frequent trading.
So, how can one develop their own on-chain analysis strategy? First, select a few core indicators, thoroughly understand the formulas behind the indicators, recognize their calculation principles, and then better understand the meaning of the indicators and the timing of their application. The second step is to screen the indicators. There are hundreds of on-chain data, many of which are highly correlated. If the correlation is too high, they are easily affected by the same market factors, which not only narrows our observation of the market, but may also affect the overall decision-making due to a few market incentives. Therefore, choosing complementary indicators can more comprehensively capture market dynamics. The following introduces some on-chain data sources that are easy to grasp and gradually familiarize with for investors in the early stages.
On-Chain Analysis Tools
On-Chain analysis tools can be broadly divided into two categories: Blockchain explorers and chart analysis websites. Blockchain explorers are basic tools used to directly query and browse the original data on the Blockchain, such as transaction records, address balances, and Block information. Chart analysis websites are more advanced, focusing on extracting key indicators from Blockchain data and presenting them in chart form to help users deeply analyze market trends, holder behavior, and capital flows.
- Blockchain Explorers:
- Etherscan (Ethereum Network)
- Blockchain.com (Bitcoin Network)
- Chart Analysis Websites:
- glassnode: Has the most comprehensive and professional indicators, but most charts require payment.
- CryptoQuant: Provides comprehensive on-chain and market data analysis, covering exchange flow indicators and more.
- dune analytics: Allows users to customize SQL queries and generate custom charts.
On-Chain Indicators
Transaction Volume: Tracking the Scale of Capital Flows
The total value (measured in USD or Bit) of all transactions recorded on the Bit blockchain network within a specific time period. This indicator reflects the scale of capital flows in the network, but does not include order matching within exchanges (only on-chain data).
How to Interpret:
- High or Low Transaction Volume: High or low transaction volume is usually related to market sentiment. High volume may be accompanied by violent fluctuations (up or down), while low volume indicates a quiet market, which may be in a consolidation phase or a bear market.
- Rapid Changes in Transaction Volume: When transaction volume increases rapidly in the high range, it may signal an overheated market reaching a top. Conversely, when transaction volume increases rapidly in the low range, it indicates capital inflows, which can be seen as an entry signal.
Example Chart:
XRP Ledger: Transaction Count (Total), data source: CryptoQuant
Active Addresses: Measuring Network Participation
The total number of unique Bit blockchain addresses that sent or received at least one transaction within a specific time period, reflecting the actual number of participants in the Bit blockchain network.
How to Interpret:
- High Active Addresses: Indicates more independent participants in the network, which may be new users entering the market, increased speculation, or more active trading by existing holders. This is often associated with price increases or rising market sentiment.
- Low Active Addresses: Indicates a decrease in network participation, which may be investors exiting the market, often accompanied by price declines or a quiet market.
Example Chart:
Bitcoin: Active Addresses, data source: CryptoQuant
URPD (UTXO Realized Price Distribution): Insights into Coin Holder Distribution
Simple Introduction to Interpretation:
- Coin Holder Structure: The coin holder distribution helps us understand the potential support and resistance levels for the price. For example, if there is a large accumulation of coins above $80,000, it suggests that this price range has a consensus among many holders. In such areas with large coin accumulation, the price is likely to fluctuate within this range. If the price rises above $85,000, some holders may choose to realize their profits, causing the price to fall back to the original range; conversely, if the price breaks below this range, it may trigger panic selling.
- Distribution Process: Distribution refers to the process where some early holders who bought at low prices sell their coins at high prices. For example, if the $90,000 coin holder range increases by 100,000 Bit, and the $40,000 range decreases by 100,000 Bit, it can be inferred that the early holders with a cost basis of $40,000 have sold 100,000 Bit at the $90,000 price. This distribution process reflects the actions of low-cost holders. If the distribution scale is large, it may signal an overheated market or an impending correction; if the distribution decreases, the market may be entering an accumulation phase.
Example Chart:
NUPL (Net Unrealized Profit / Loss): Insights into Market Profitability
NUPL is a profitability indicator that helps us assess the overall profitability or loss situation in the market by comparing the market capitalization and the realized capitalization (the net value of unrealized profits or losses of all tokens in the market).
Formula:
- Market Capitalization: Current price × Circulating Supply.
- Realized Capitalization: The sum of all tokens calculated at their last transaction price.
- Example: Assume there are 5 Bit, with a buy-in price of $50,000 and a current price of $100,000. Then the market capitalization is 5 × $100,000 = $500,000, and the realized capitalization is 5 × $50,000 = $250,000. NUPL = (500,000 - 250,000) / 500,000 = 0.5.
Simple Introduction to Interpretation:
- NUPL > 0.5: The market is highly profitable, may be overheated, approaching the top of a bull market, and holders may start to realize profits.
- NUPL between 0.25-0.5: The market is moderately profitable, in the mid-stage of a bull market, investor confidence is increasing but there is still room for upside.
- NUPL between 0-0.25: The market is near the break-even point, may be the early stage of a bull market or a stabilization period after a bear market.
- NUPL < 0: The market is in net loss, at the bottom of a bear market, with panic or capitulation sentiment, and may be approaching a reversal.
Assuming NUPL is very high (e.g., 0.7) today, it means the overall profitability in the market is very high, which may attract more holders to realize profits, increasing selling pressure. Therefore, excessively high NUPL is often seen as a relative warning, reminding investors that the market may be overheated.
Bitcoin: Net Unrealized Profit/Loss (NUPL), data source: CryptoQuant
On-Chain Analysis Learning Resources
After introducing several basic and practical indicators above, it is recommended that you can select one on-chain analysis website to start exploring. In addition, there are also rich learning resources on social media platforms, such as Mr. Beggar (@market_beggar) on X, who often shares on-chain data analysis and tutorials. Another recommended resource is the free 'Week on-chain newsletter' on glassnode. Learning about some on-chain indicators from it every week, combined with their market analysis, is a practical and content-rich learning repository that will help you gradually master the essence of on-chain analysis.
