key takeaways
- On-chain data helps to analyze investor behavior and potentially identify market trends.
- While blockchain data brings a unique perspective on investor behavior, one must consider technical and fundamental analysis to make well-informed trading and investment decisions.
- Femex, one of the most popular cryptocurrency exchanges in the industry, provides you with a wealth of information on on-chain metrics to help you become a successful trader.
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On-chain analysis (also known as blockchain analysis) is an emerging field that captures information about public blockchain activity.
Leveraging on-chain data
For anyone unfamiliar with the technology, blockchains are public databases where information about network transactions (but not the identity of the transactors) is accessible to anyone.
whereas technical analysis Focusing on the price and volume of an asset, on-chain analysis focuses on extracting data from the state of the blockchain, such as transaction activity patterns, concentration of token ownership, social sentiment or exchange flows.
This area of analysis emerged in 2011 with the creation of a coin days destroyed (CDD), a metric used to measure market participation by verifying the age of tokens transferred in a given day. Since then, we have seen the creation of a very wide number of on-chain analysis tools (glassnode alone has developed more than 75 on-chain metrics).
The following section is a summary of the most useful and widely used on-chain indicators that crypto investors can use to evaluate activity on the blockchain:
Net Unrealized Profit or Loss (NUPL): NUPL tells us whether there is an unrealized gain or loss in the market as a whole. According to lookinobitcoin.comUnrealized profit/loss is arrived at by deducting the actual value from the market price.
The market cap is the current price of a token multiplied by the number of tokens in circulation. The actual value is the average of the added value of each coin when it was last transferred, multiplied by the total number of coins in circulation.
By dividing the unrealized profit/loss by the market cap, we get the net unrealized profit/loss.
A NUPL greater than zero means that overall investors are currently in a position of profit. If it is less than zero, an unrealized loss is taking place in the entire market.
Market Value to Actual Value (MVRV): This metric has helped predict the ups and downs of bitcoin. It determines whether the current market cap is overvalued or undervalued. MVRV is calculated by dividing the market price by the daily actual price.
The higher the ratio, the more people realize a profit when they sell their tokens. And vice versa: the lower the ratio, the more people will take a loss by selling their coins.
Funding Rates and Open Interest: Investors use both indicators to weigh the level of interest in the crypto market.
Funding rates are regular payments that permanent contract (perps) traders have to pay to maintain open positions. Perpetual is a type of futures contract that has no expiration date. These payments ensure that the per price and the spot price regularly match.
On the other hand, open interest (volume-based metric) is the sum of all open futures contracts. However, open interest does not tell us whether the contracts are long or short. Open interest is helpful because it shows how much capital is flowing into the market and can help predict the ups and downs of a market when combined with price trends.
Expenditure Output Profit Ratio (SOPR): This is another tool that helps in measuring the market sentiment. The ratio indicates whether investors are selling at a profit or loss over a given period of time. This is achieved by dividing the USD value when the UTXO (wallet balance) is created by the value when the UTXO is spent.
A ratio greater than one means that, for a specific time frame, more people are selling coins at a profit. Conversely, a SOPR of less than one means that more coins are being sold at a loss than their purchase price.
Exchange Flow: Exchange Flow tracks the movement of coins entering and leaving exchanges.
When exchange flows prevail, we believe traders sell their tokens to protect profits. Heavy inflows could signal the start or correction of a bear market.
Exchange outflows may indicate that token buyers are remitting their assets with the intention of holding them in self-custodial wallets, therefore creating a shortage of tokens on exchanges and increasing their price.
The combination of on-chain analysis and other technical and fundamental indicators can help investors make wise investment decisions. Femex Provides all this knowledge in one hub, allowing users to make the most of their on-chain and trading skills, filter noise, and make profits by predicting the next market move.