On-chain metrics

1. On-chain Metrics: A Beginner's Guide

Introduction

So, you're starting to learn about cryptocurrency trading and you've heard about "on-chain metrics"? Don't worry, it sounds complicated, but it's actually a powerful way to understand what's *really* happening with a cryptocurrency, beyond just the price on an exchange like Register now or Start trading. This guide will break down on-chain metrics for complete beginners, explaining what they are, why they matter, and how you can start using them.

Simply put, on-chain metrics are data points derived directly from a blockchain. They show us how the network itself is being used – things like how many people are transacting, how much crypto is being moved, and where it's going. Think of it like looking at the internal workings of a car engine instead of just watching it drive down the road. You get a much deeper understanding.

What are On-Chain Metrics?

Unlike technical analysis which looks at price charts and trading volume, on-chain analysis dives into the blockchain data. Here are some key metrics:

• **Active Addresses:** This is the number of unique crypto addresses that were used to send or receive crypto during a specific period (like a day or a week). More active addresses generally suggest greater network usage and potentially increasing interest.
• **Transaction Count:** The total number of transactions happening on the blockchain. A rising transaction count can indicate growing adoption.
• **Transaction Volume:** The total amount of cryptocurrency moved on the blockchain. This is measured in the native cryptocurrency (like Bitcoin or Ether). Higher volume often means more activity.
• **Hash Rate:** (For Proof-of-Work blockchains like Bitcoin) This measures the computing power being used to secure the network. A higher hash rate means the network is more secure.
• **Mining Profitability:** (For Proof-of-Work blockchains) This indicates how profitable it is for miners to validate transactions.
• **Supply Held by Exchanges:** How much of a cryptocurrency is currently sitting on exchanges. A large amount on exchanges *could* suggest potential selling pressure. A decreasing amount suggests people are moving crypto *off* exchanges (often a bullish sign).
• **Supply Held by Long-Term Holders:** How much crypto is held by addresses that haven’t moved their coins in a significant period (e.g., over a year). This is a measure of "hodling" and strong belief in the project.
• **Network Value to Transaction (NVT) Ratio:** This is like a price-to-earnings (P/E) ratio for a cryptocurrency. It compares the network's market capitalization to its transaction volume. A high NVT ratio *could* suggest the network is overvalued.
• **Mean Dollar Denominated Cap (MDDC):** A metric that attempts to smooth out market cycles by looking at the average market cap over a period of time.
• **Realized Cap:** The value of all coins that have been moved on-chain, calculated by multiplying each coin's last spent price by its current quantity.

These are just a few examples. There are many more on-chain metrics, each offering a different perspective. Resources like Glassnode and Santiment provide detailed on-chain data and analysis.

Why are On-Chain Metrics Important?

On-chain metrics can provide valuable insights that aren't visible through traditional price charts. Here's why they're important:

• **Early Signals:** They can sometimes signal changes in market sentiment *before* they are reflected in the price.
• **Fundamental Analysis:** They offer a deeper understanding of the underlying health and usage of a cryptocurrency. This helps with fundamental analysis.
• **Confirmation of Trends:** They can confirm or refute trends observed through technical analysis.
• **Identifying Opportunities:** By understanding network activity, you can potentially identify undervalued or overvalued cryptocurrencies.
• **Risk Assessment:** Metrics like exchange supply can help assess potential risks, like large sell-offs.

Comparing On-Chain vs. Off-Chain Data

Let's compare on-chain and off-chain data:

Feature	On-Chain Data	Off-Chain Data
Source	Directly from the blockchain	Exchanges, news, social media, etc.
Data Type	Transaction data, addresses, network activity	Price, volume, sentiment, news headlines
Transparency	Highly transparent and verifiable	Can be manipulated or biased
Focus	Network health and usage	Market sentiment and price action
Examples	Active addresses, transaction volume, NVT ratio	Trading volume, candlestick patterns, news articles

It's crucial to use *both* on-chain and off-chain data for a comprehensive analysis. They complement each other.

Practical Steps: How to Start Using On-Chain Metrics

1. **Choose a Data Provider:** Start with a platform like CoinMetrics, Glassnode, or Santiment. Many offer free tiers with limited data. Join BingX offers trading tools, but for on-chain data, a dedicated provider is best. 2. **Select a Cryptocurrency:** Focus on one cryptocurrency at a time (e.g., Bitcoin, Ethereum, Solana). 3. **Start with a Few Key Metrics:** Don't try to analyze everything at once. Begin with Active Addresses, Transaction Volume, and Supply Held by Exchanges. 4. **Observe Trends:** Look for patterns and changes in these metrics over time. Are active addresses increasing or decreasing? Is transaction volume spiking or falling? 5. **Correlate with Price Action:** See if changes in on-chain metrics align with price movements. For example, a surge in active addresses *might* precede a price increase. 6. **Use with Other Analysis:** Combine on-chain metrics with candlestick patterns, trading volume analysis, and moving averages for a more informed trading decision. 7. **Consider a trading account:** Open account to start implementing your strategies.

Example: Analyzing Bitcoin's On-Chain Data

Let's say you're looking at Bitcoin. You notice that:

• Active Addresses are steadily increasing.
• Transaction Volume is also increasing.
• Supply Held by Exchanges is decreasing.

This *could* be a bullish signal, suggesting that more people are using Bitcoin, more coins are being moved, and investors are taking Bitcoin off exchanges for long-term holding. However, always remember that on-chain analysis is not foolproof.

Advanced Concepts

• **Cohort Analysis:** Grouping transactions based on when they were first made to understand long-term holder behavior.
• **SOPR (Spent Output Profit Ratio):** Indicates whether coins moved on-chain were profitable or loss-making at the time of transaction.
• **MVRV Z-Score:** Compares market capitalization to realized value, indicating whether the network is overvalued or undervalued.
• **Puell Multiple:** A measure of mining profitability relative to historical values.

These advanced concepts require a deeper understanding of blockchain technology and data analysis.

Risks and Limitations

• **Data Interpretation:** On-chain data can be complex and open to interpretation.
• **False Signals:** Metrics can sometimes give false signals, leading to incorrect trading decisions.
• **Blockchain Forks:** Forks can complicate on-chain analysis.
• **Privacy Coins:** On-chain analysis is less effective with privacy-focused cryptocurrencies like Monero.
• **Market Manipulation:** While harder to manipulate than price, on-chain data can still be influenced by sophisticated actors.

Conclusion

On-chain metrics are a powerful tool for cryptocurrency traders and investors. By understanding how blockchains are being used, you can gain valuable insights that can inform your trading decisions. Start with the basics, practice analyzing data, and combine on-chain analysis with other forms of analysis for the best results. Remember to always manage your risk and never invest more than you can afford to lose. Consider paper trading your strategies before using real capital at BitMEX or a similar platform.

Blockchain Technology Cryptocurrency Decentralization Trading Strategy Technical Analysis Fundamental Analysis Exchange (Crypto) Volatility Risk Management Market Capitalization

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