Whale Watching — On-Chain Analysis Tools In Action
Just for fun: How we use On-chain Analysis Tools
Up-Front Disclaimer: This article and the analysis included here do not constitute financial advice. This article is intended purely as an educational exercise for working with available on-chain analysis tools. You alone are responsible for your trading decisions and their outcomes.
As a leading Web3 Venture Studio, we spend a very very small proportion of our workday working with the crypto markets. Our focus is our projects. But of course, we would be naïve not to maintain an awareness of market movements and how the ecosystem is performing. So, over the past years we have a few tools that we have used to help us consider potential price movements for tokens where big events are forecast. In this article, we will talk you through one of our favorite strategies for learning about the tokens that you are interested in. We call this type of on-chain analysis: whale watching.
Getting Started:
Finding an edge in the market is hard, especially when it comes to predicting the direction of assets, like tokens, whose price is affected by so many factors. Token unlocks, changes in buying pressure, news events, break in correlation with other asset classes, project failures, hacks, and other technical issues all contribute to making digital assets movements extremely unpredictable.
For the average retail investor, it can be so hard to understand a project and its dynamics in detail, that it often makes more sense to avoid this endeavor altogether and rely on long-term investing strategies in more established assets like Ethereum and Bitcoin.
Usually, the players whose understanding of a particular protocol is the strongest are insiders (team and advisors), institutional backers, and whales who are likely to have been following the project dynamics and evolution for a long time. Furthermore, these players are likely to have a much stronger network and up-to-date information at their disposal, compared to the average retail user learning about the project from Crypto Twitter or YouTube.
Understanding this concept is one of the keys to increasing accuracy when speculating on price movements in the crypto space: that’s why, when analyzing a token and before placing our bet, we like to dig around on-chain, and use platforms like Etherscan, Dune, and Nansen to clearly understand the behavior of the largest holders of the token we are interested in.
An Example:
At the time of writing, we see that ApeCoin ($APE) is going to experience a sizeable unlock in one week, worth approximately $180 million at current prices, or more than 10% of the circulating market capitalization. Most investors seem to think that, by increasing circulating supply, token unlocks necessarily lead to bearish price action in the underlying token, but the truth is that so much happens under the surface in the days preceding an unlock. Analyzing these dynamics is outside the scope of this article, but it’s important to understand that “token unlock” and “bearish price action” do not necessarily go hand-in-hand.
How we get a sense of price reaction?
Large holders and insiders with their powerful network, experience, and ability to move prices, can help us to better understand the current context for price movements.
To study what large holders and insiders are doing, we lean on on-chain analysis tools. Here’s our process:
Step 1 — Identifying Key Players:
The first step involves visiting Etherscan and looking for the ‘Holders’ page of the relevant token. In the case of ApeCoin ($APE), this page is: https://etherscan.io/token/0x4d224452801aced8b2f0aebe155379bb5d594381#balances.
Studying this page should give good insights into which personal wallets, exchanges, or contracts are holding large quantities of $APE. You can write down these addresses manually, but chances are most of these won’t have actively traded the underlying token. So, they are not particularly useful to acquire information for short-term speculation. We like to look through these wallets anyways: this allows to identify some interesting players, or some patterns over the course of a few days. For example, you might notice that as the price grows or declines, a large wallet’s holdings change, which would require further investigation.
Step 2 — Following large traders
A more accurate way to visualize how large holders are behaving in anticipation of a major event (such as a large token unlock, or a news announcement), is to visit https://www.dextools.io/app/, and look for the specific token you are interested in.
By pasting the token contract address you find on Etherscan, we are able to visualize the price action for the token, but most importantly, we can access a list of the most recent DEX trades involving that specific cryptocurrency.
In particular, we are interested in doing this starting a few days before a major event such as a large token unlock, just like in the ApeCoin case. By sorting recent trades based on the total ETH value traded, we can spot wallets of large players who are shifting their holdings just a few days before a major event.
In the picture above, we see a bunch of trades worth more than 70ETH, or $110,000 at the time of writing. While trade size doesn’t imply higher accuracy, we can still assume that there could be quite a few “smart money traders” in this category, compared to those trading with small size.
At this point, it’s a matter of patience and trial-and-error: by clicking on the “Maker” column next to each trade, we are redirected to the Etherscan page of each of the wallets who are responsible for the transaction on that specific row.
From here we can copy the wallet address, and analyze its trade history using a variety of platforms, such as:
- Dune Analytics
- DeBank
- Arkham Intelligence
- Nansen
We suggest you manually check out each one, and find how the peculiarities of each can help you in your Web3 research.
Step 3 — Analyzing Traders’ Behavior
Mastering these platforms allows you (among other things) to identify whether a particular wallet is on average profitable or not, by looking at when buys and sells for a specific token were executed.
In particular, we would like to name a great Dune Analytics tool developed by https://twitter.com/defi_mochi, which allows you to easily analyze any wallet’s behavior with a specific coin, overall profit & loss realized, and token inflows/outflows. This great tool works for tokens belonging to four major EVM chains: Ethereum, Polygon, Arbitrum, and Optimism.
To recap the last two steps, you can find large ticket trades from dextools, visit Etherscan and copy the full wallet address, then paste it in the Dune Analytics tool linked above, and easily find the most profitable addresses for a particular cryptocurrency through trial-and-error.
Step 4 — Bottom Line
Once you have understood the process for studying a particular wallet, the strategy becomes purely methodical. We typically spend some time going through large transactions happened over a period of time, find around 5–10 profitable wallets who are adopting similar behavior, and (if and only if behaviors coincide — e.g., most buy in anticipation of a catalyst), try to align our movements with theirs, as they might have high-quality information for trading that specific token.
You should note that not every token with a particular catalyst has a group of large holders aligning towards a single outcome in the days preceding the event. Most of the times, the process explained will be unproductive and time consuming. While this may sound as a negative aspect of the strategy, we believe that it actually helps your decision-making by inviting you to only take trades where the smartest players are clearly on your same side, while avoiding “uncertain” trades, which could well damage your portfolio.
Even after entering a trade in light of a “smart money confluence”, it is important to remember that one should constantly monitor their position by looking at what large wallets are doing, similarly to the process for opening the trade itself. In case of general selling activity detected in our “whale watching”, we usually don’t hesitate and close the position.
We hope that you enjoyed this article and found it useful. Please remember this is NOT intended as financial advice. It is simply an overview of how we use publicly available tools to follow token movements. Also remember that “smart money confluence” does not imply that the token will perform as you might expect.
If you found this article interesting, check out our other articles from our -publication, and make sure to follow us on twitter to stay up to date on web3, DeFi, and beyond.
