Those who invest in the financial market know that there are several ways to analyze assets and also the macroeconomic scenarios that influence the rise and fall of stocks. With cryptocurrencies , however, it is even more complex, since it is a new segment that has only just taken shape.
It is in this context that on-chain analysis comes into play , the main ally for decision-making in the crypto market. This mechanism allows investors and analysts in the field to examine the nuances of a cryptocurrency in the market, ranging from its price fluctuations to future expectations.
Understand why this type of analysis is important and learn how to use it to your advantage when investing in a crypto asset.
What is on-chain analytics?
On-chain analysis is a research strategy widely used in the financial market. It is based on capturing data and information patterns to define the “path” that certain assets follow in the market. In the cryptocurrency segment, it is the main practice for improving trading strategies.
The capture of on-chain data is done in blockchain networks and serves to define a route of information and behavior patterns of a cryptocurrency. Unlike technical or graphical analysis, for example, on-chain analysis is based on historical trends and encrypted data.
This type of analysis generates a block of information about an entire asset. With on-chain analytics, an investor can determine how a cryptocurrency performs by capturing sending and receiving addresses, tokens or coins transferred, transaction amounts and fees, and funds remaining for a given address.
It also contains block data such as timestamps, mining fees, rewards, and the linked smart contract code.
How on-chain analytics work in practice
On-chain analysis is nothing more than tracking a blockchain, which allows the examination of all the fundamentals of an asset – a practice that helps investors make better decisions when trading a cryptocurrency.
This analysis becomes even more efficient in the crypto market, since blockchain networks are transparent and open source mechanisms, allowing metrics to be obtained in a practical and optimized way. Wallets, in turn, reveal the positions of each “holder” and cost bases at any time of the day.
When to use on-chain analytics?
On-chain data is widely used by traders in the crypto market, whether for better decision-making, or to give recommendations and present market expectations. On-chain analysis enables a clearer prediction of future cryptocurrency movements, allowing investors and analysts to plan ahead to trade the asset.
If we use Bitcoin (BTC), the main crypto in circulation today, as an example, these movements become even more solid. By taking into account the number of active addresses and the amount of movements made on the blockchain network, it is possible to know if there is a great demand for the currency and determine its performance in the market.
Network metrics can also be used to provide details about the behavior of the investors themselves: what they do, where they live and what the whales and sardines of the crypto world eat .
Limitations of using on-chain
Despite being a valuable resource for analyzing the crypto market, on-chain is not always the best option, as there are limitations to its use. When a crypto protocol involves two layers, the accuracy of your information can be affected.
The Lightning Network (LN) peer-to-peer payment protocol is a good example of this division of information flow: linked to the Bitcoin blockchain, it generates transactions outside the asset’s original chain. Therefore, it requires its own on-chain analysis.
What data can be obtained with the on-chain?
Anyone who thinks that on-chain analysis is only for decision-making in the crypto market is wrong. This type of strategy can be used for different purposes, as it offers a range of data and insights thanks to the multi services of blockchains. Check out the main information that can be obtained through the tactic:
- Position of miners , investors and institutions in the market;
- Cryptocurrency performance time , with historical movement, flow and demand data – this type of analysis generates short and long-term insights;
- Computational strength of the network , allowing to assess whether it is more or less robust;
- Market capitalization of cryptos, by measuring the value and calculating quotes;
- Network Value to Transactions (NVT) , as it defines the relationship between network value and the ability to process transactions.
- Number of active addresses , signaling the demand for a certain cryptocurrency.
Now that you know what on-chain analysis is and its main purposes, it is easier to outline a crypto investment strategy focused on – in fact – consistent data. Before investing, also remember to follow the market and choose a safe exchange to trade your assets.