Why you need on-chain analysis in a bear market.
Everyone knows it, we are deep in the capitulation phase, but there is a tool that will always tell the truth; it’s called On-Chain analysis. Blockchains produce incorruptible data, allowing us to get accurate, reliable metrics of significant economic activity in crypto networks.
The analysis is possible because most of the blockchains are public ledgers. Thanks to that detail, you can check all the activities happening in real-time.
There are plenty of paid and free tools to perform On-Chain analysis, and we will go deep into the most important ones.
Although it’s impossible to predict the future, most behaviors have common patterns. By unlocking this on-chain data, we can change how we measure market sentiment and behavior.
Micro, Macro, and Protocol-specific analysis.
We focus on three different categories of on-chain analysis.
The Micro analysis is the inspection of a specific wallet through blockchain explorer. Usually, all the biggest chain have their own; thanks to it, you can inspect all its aspects: biggest holders, VC wallets, DeFi wallets, inflows, and outflows of coins.
The Macro analysis in our specific case will be the evaluation of those key metrics in BTC. It is often obtainable through paid tools and does not involve a single wallet but a range of macro data.
You often hear “BTC is king,” well, most of the time, it is true.
Checking the whale's behavior, the exchange deposit flows, Dormancy, and many more can help gauge the market sentiment.
The Protocol Specific analysis helps judge the protocol activity, TVL, number of TXS, profitability, and many key metrics.
This helps compare similar protocols and decide which one the winner isin your research.
Our focus.
We will focus only on the $BTC Macro Analysis aspect of the on-chain analysis for this report. So which are the main key metrics that we look into during the different market cycles? Which are the biases of such metrics? And which tools can come in handy when performing such analysis?
There are plenty of websites to execute macro analysis on BTC; for this time, we will use CryptoQuant.
Here below are our favorite crypto on-chain analysis indicators.
1. Exchange Reserve (All exchanges)
Equals to the total coins held in the exchanges.
If the reserve indicator is rising, it means higher selling pressure. More people are depositing into the exchanges to sell their coins.
It could be helpful to use it combined with the Stablecoin exchange reserve; why? When stablecoin value rises, it indicates possible buying pressure.
2. Exchange Inflow Total (All exchanges)
Very similar to the previous chart, this one shows the number of coins transferred to exchanges. A high indicator is associated with increased selling pressure in the spot exchange.
The same stablecoin rules as before also apply here.
3. Net unrealized Profit/Loss (NUPL)
Let’s assume the last coin movement is always a purchase.
If this amount of coin gets sold in profit, the indicator rises, contrary to a loss / break even.
The higher the indicator, or the people in profit, the higher the risk of increased selling pressure.
Net Unrealized Profit and Loss (NUPL) is the difference between market cap and realized cap divided by market cap.
4. Miners’ Position Index (MPI)
Spike in this indicator shows miners are sending more coins than usual, which might be associated with possible selling. When miners send a huge chunk of their reserve simultaneously, it might trigger a price drop.
5. Miner Supply Ratio — All Miners
This is very useful when associated with the Miner’s Position Index (MPI).
It indicates the miner wallet reserve compared to the total supply of BTC, lower reserve = possible selling pressure.
Miners have the market at the core of their business, so rest assured they study it more than anyone.
6. Puell Multiple
Another interesting metric to keep track of the miner sentiment is the Puell Multiple.
Puell Multiple is “How profitable miners are relative to the last historical one year if all created bitcoins are sold in the market?”
Puell Multiple compares miners’ 365-day average expected revenue to their short-term gain.
7. Coin Days Destroyed (CDD)
Before going through that indicator, you must know what a UTXO is.
Don’t worry; we got you covered with this straightforward explanation of Andreas M. Antonopoulos.
CDD provides the sentiment of long-term holders and behavior.
In the CDD chart, a high value of the indicator means long-term holders are moving their coins, which usually indicates possible selling.
8. Open Interest (CDD)
After each day, the total number of outstanding contracts held by market participants (only for derivative exchange trading pairs)is called open interest.
The total activity of the futures market is measured by open interest.
Increased open interest indicates that new cash is entering the market. As a result, the current trend (up, down, or sideways) will continue.
Falling open interest indicates that the market is liquidating and that the current price trend is ending.
As a result, open interest is a leading indicator of an upcoming trend change.
Biases
- Some events and transactions happening on Layer 2s might escape the On-chain metrics.
- We only have limited years when looking at historical data. After all, BTC has only been around for 13 years.
- The on-Chain analysis is a tool focused on the long-term game; it might not be helpful for daily traders.
- Although Whales are supposed to be the “expert” in the field, they don’t always time the market. This is why we decided not to include any whale metric.
- Some of the famous indicators have been invalidated in the past.
Disclaimer
This is not, in any case, financial advice; the goal of my research will always be to dive deep into projects and study them from different angles; I do include personal opinions based on my experience with similar projects that I have recently learned.
I am and will always be open to discussion.
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Please always do your research before investing in anything.
