What is on-chain ? A Beginner's Guide to Fundamental Analysis with On-Chain Data

On-chain is a data analysis approach that helps investors track how funds move and understand the activities of other investor groups in the market, thereby collecting information and assisting in the investment decision-making process. Join Allinstation in exploring on-chain analysis and understanding effective on-chain analysis methods in the following article.

Overview of Fundamental Analysis and On-Chain Data

What is On-Chain Data Analysis?

In the blockchain world, on-chain data analysis plays a crucial role alongside technical analysis (TA) and fundamental analysis (FA) applied in traditional financial products. With the transparent and clear nature of blockchain transactions, on-chain analysis helps users track wallet behaviors, observe investment fund activities, and check token allocations in projects.

Applications of On-Chain Data Analysis

On-chain analysis provides tools and methods to:

• Track Wallet Behavior: Examine wallet transactions to better understand the strategies of large investors, investment funds, or organizations.
• Analyze Investment Funds: Evaluate the investment activities of large funds, observe cash flows and their investment decisions.
• Check Token Allocation: Monitor token distribution and usage in a project, assess the level of asset dispersion and project allocation.

3 Effective On-Chain Analysis Methods

On-chain data analysis is an important method for understanding blockchain activities and making informed investment decisions. Below are some aspects and useful tools in on-chain data analysis, focusing on the Bitcoin network, wallet activities, and token allocation analysis in projects.

Bitcoin Network Analysis

Bitcoin is not only the basic platform for the entire crypto market, but its price fluctuations also strongly influence the entire cryptocurrency market. Understanding Bitcoin's on-chain indicators helps you grasp market trends and wallet behaviors.

According to Trading Advisor Bao Chau, effectively analyzing Bitcoin's price behavior makes you more confident and ensures your judgment regardless of which token you're about to invest in the Crypto market. Here are some important indicators to track:

• Bitcoin: Accumulation Trend Score (7d Moving Average):
  • Function: This indicator helps you track Bitcoin accumulation or distribution trends in the network. A strong indicator suggests a strong accumulation trend, typically signaling a Bullish trend, while a weak indicator suggests distribution and potential upcoming Bearish market.
  • Example: If this indicator is high, it can predict that many investors are accumulating Bitcoin, which could lead to price growth.
• Bitcoin: Balance on Exchanges (Total) [BTC] – All Exchanges:
  • Function: Track the amount of Bitcoin reserved on exchanges or a specific exchange. This data helps you understand the current Bitcoin supply situation on exchanges.
  • Example: If the amount of Bitcoin on exchanges decreases, it could indicate large movements from exchanges to personal wallets, potentially signaling readiness for a price increase.

Useful Tool: Glassnode is a popular tool that helps you track Bitcoin's on-chain indicators and analyze wallet behaviors.

Analysis of a Specific Wallet Address Activity

Analyzing wallet behavior helps you better understand the investment activities and strategies of prominent wallets. Each whale has its own investment appetite, and following whale tracks and investing according to whale behavior is a way to leverage market fluctuations to seek profits. On-chain social tools like Debank and Arkham Intelligence support you in wallet activity analysis.

• Debank:
  • Function: Allows you to view the total balance value of a wallet across multiple chains, track transactions, and wallet participation in DeFi platforms.
  • Example: You can track a wallet to see total balance value, transactions, and participation in DeFi protocols.
• Arkham Intelligence:
  • Function: Provides information about the activities of entities in the crypto market.
  • Example: You can track wallet transactions, analyze behavior, and other activities of wallets or organizations.

Token Allocation Analysis in a Project

Token allocation analysis helps you better understand token holders and their influence on the project. From the illustration, you can somewhat clearly see the profile of PEOPLE token holders and predict their actions, thereby forecasting the token's future price. Tools like Nansen provide detailed information about token balance distribution and its changes over time.

• Nansen:
  • Function: Aggregates data on token quantity in wallets, token balance changes in 24 hours, 7 days, and 30 days.
  • Example: Nansen helps you track token distribution in wallets, analyze distribution ratios, and changes over time.
• Dune Dashboard and Flipside:
  • Function: Provide free dashboards to retrieve on-chain data and analyze token information.
  • Example: You can use Dune Dashboard to view statistics of the top 100 EOA wallets of $PEOPLE token and analyze metrics like average purchase price and ROI.

Notes When Using On-chain Data in Investing

Depositing to CEX Doesn't Necessarily Mean Selling, and Withdrawing Doesn't Mean Buying

A common misconception when analyzing on-chain data is believing that when an entity deposits tokens to an exchange (CEX), they will sell, and conversely, when withdrawing tokens to a wallet, they have bought. However, the data provided by CEX is Off-Chain, so it's impossible to accurately determine whether someone has bought or sold. If we default to this approach, we may fall into a trap set intentionally.

Tokens sent to an exchange are not only for selling but can also be used for other purposes like lending, staking, collateralization, etc. Similarly, tokens withdrawn from an exchange may come from various sources other than market purchases, such as borrowing from another asset or OTC (over-the-counter) trading, which does not affect market price.

On-chain Data is Difficult to Suit Long-term Investment

On-chain data often fluctuates continuously, suitable for traders to maximize capital utilization. However, for long-term project investment, many other factors need to be considered, such as:

• Project development team.
• Project investment fund.
• Tokenomics model.
• Project operation and revenue model.

Therefore, using on-chain data to make long-term investment decisions is not reasonable. However, on-chain data can be used in a micro form to determine the long-term trend of the entire market.

Summary

Read more:

• Nansen Usage Guide (Nansen V2) - Top On-chain Analysis Platform.
• Latest 2024 Free Arkham Platform Usage Guide