As most of you are aware, Bitcoin is very different to traditional assets. It does not generate the kind of income rental yields from real estate assets or cash flows from stocks or bonds. This makes it very difficult for many people on how to analyze and how to value bitcoin. This is where on-chain analysis comes in, as the bitcoin blockchain is an open and transparent system, which in-turn gives us an understanding of what is going on in the bitcoin ecosystem and all of this in real time.
Although this could be used as a toolkit to make better investment decisions, we strongly urge everyone to do their own research before making any investment decisions. In today’s article we are going to see what is on-chain analysis by looking at key indicators and how Bitcoin is performing in the short term.
Unlike the fundamental analysis or the stock-to-flow model that links the future value of Bitcoin to its scarcity, the on-chain analysis is based on analysis of available blockchain transactions. It is based on the notion that the on-chain analysis is best for long term traders or to make investment decisions, since it gives an in-depth idea of what is going on, under the tip of the iceberg. In our view, a long-term trade is when a crypto investment is maintained for at least six months to a year.
There are hundreds of on-chain metrics that are being monitored constantly by seasoned analysts and traders. For today, we are starting with three key metrics that are basics to start with on-chain analysis.
In simple terms, the number of accounts is equal to the number of public addresses in the blockchain. Although this would suffice for a beginner or an average investor, the analysts also look at other related metrics such as average number of accounts per day, average number of active accounts per day and number of verified accounts, as these metrics are very relevant in measuring the activity on the blockchain that contributes to forecasting the future value of Bitcoin.
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<source: Into the block>
On a 3-month trend, it appears that the total number of addresses with balances (implying accounts that have some amount of bitcoin in it), has been slowly rising. This could be attributed to drop in price amidst the current bear run, however the investor sentiments are holding strong.
For analysts, measuring the real activity on the blockchain is of utmost importance. This converts to more transactions on the network and leads to more activity in the ecosystem.
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<source: Into the block>
We can notice that the transactions start at low on early days (Sundays) of the week and reach a peak on the following days. Currently the 7-day average stands at ~ 257.03k transactions on any given day with volume at 1.91m Bitcoins or $37.78b USD.
For any address with a balance of tokens, the average price (cost) at which those tokens were purchased are measured and compare its current price. Although this might sound a tad technical, in simpler terms, if Current Price > Average Cost, the address is classified as “In the Money” and if Current Price < Average Cost, address is classified as “Out of the Money”. This lets us study the curve in which the transactions are happening, to see if we are actually buying bitcoins at less than average costs.
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<source: Into the block>
Looking at the 3 months trend, we can notice that a larger number of transactions are actually happening “in the money”, as the price line is trending largely in green, compared to early August and late June trend, where it was “out the money”. In terms of Year-to-date, otherwise referred to as YTD, 25.58m addresses are “in the money”, while 18.46m addresses are “out the money”.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.