Technical vs On-chain Analysis.

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16 Jan 2024

That feeling after reading numerous news articles and studying price charts just so you can predict where the market is heading, but still you are not getting the result you want. What if I say, it’s because you are missing a tool in your analysis? Let’s find out!

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WHAT IS ON-CHAIN ANALYSIS
The blockchain is an open ledger that keeps records of every transaction as stored data. Using metrics to make sense of this data and using it to make informed decisions and predictions is known as "on-chain analysis."
On-chain analysis is simply analyzing and forecasting the market using data from a blockchain ledger.
Technical Analysis vs On-chain Analysis
Technical analysis is mainly used by traders to spot buy and sell entries, and it involves analyzing the historical price of cryptocurrencies using indicators, charts, and candlestick patterns to ascertain the current trading environment and predict potential price movement. The problems with technical analysis include

Most of the indicators are lagging: Some indicators give delayed feedback on what has already passed and not what is about to come.
False Move: When a large amount of an asset is bought or sold by a single wallet, it’s still registered on the chart as a bullish or bearish move which actually could be a pump-and-dump.
Wash trades will show on the chart: Some traders can repeatedly buy and sell the same asset to increase the volume which will be recorded on the chart, making traders believe the asset is gaining momentum.

On-chain analysis has metrics that give the overall picture and the reason behind what is going on in the chart, which include:

What actions miners are taking.
Percentage loss or win amongst whales and retail traders.
The number of transactions in real-time.

All of these provide the missing context you need to differentiate between the speculative value and raw utility value of a cryptocurrency.
I’m not saying I don't use technical analysis, but on-chain analysis just helps in removing the noise and gives you real data to analyze and make predictions with.
Platforms to carry out On-chain Analysis
There are numerous platforms out there to carry out on-chain analysis. Below are some that I’ve used, and they have a very easy interface.

Glassnode (Pricy)
Defillama (Free)
Nansen (Pricy)
Into the block (Free)
Cryptoquant (Pricy)

Simple Indicators for On-chain Analysis
With a lot of activity going on in the blockchain, a lot of on-chain indicators and metrics exist out there, but I will highlight the few that I use so you can master them on time.
Exchange Flows: The exchange flow indicator simply tracks funds going in and out of exchanges. And most of the time, spikes in inflows mean holders are sending their crypto to exchanges to sell off. Outflows mean investors are withdrawing their assets or profits into their wallets for safekeeping.
For you to access the indicator, follow these steps below;

I will be using the platform IntotheBlock since it’s completely free.
After signing up, click on any cryptocurrency to get access to the indicators. I will be using BTC for this example.

From the left panel, select Exchanges and from the drop-down menu select Inflow or Outflow volume. It shows you the option to choose from major centralized exchanges and to specify the time frame you prefer.

Miner Reserves: Miners of a particular cryptocurrency invest a lot of equipment and energy and from time to time sell out of their balances, which could affect the market and no amount of technical analysis can predict that. This indicator shows the balances of addresses belonging to specific large mining pools. How can you access it for free? Same procedure as above.

It shows the major mining pools and aggregated forms which you can use for your analysis across various time frames.

This indicator identifies the average price (cost) at which tokens were purchased by an address and compares it with the current price. If the current price is greater than the cost, that particular address is “in the money.” If the current price is lower than the cost, that particular address is “Out of the Money”. When most addresses are out of the money (in loss), the selling pressure will be high since many of these addresses just want to reduce their loss and break even on their positions. When most addresses are in the money (in profit), the selling pressure will be less as they want to hold on to their positions.
Limitations of On-chain Analysis

Not enough data: On-chain analysis is new and some cryptocurrencies just don’t have enough data yet.
Numerous metrics: With a lot going on in the Blockchain, there are lots of metrics and they could all be telling different stories. It’s up to the trader or investor to build a strategy and decide.

Generally, on-chain analysis is effective over a longer time frame of weeks and months, and it is all just about human activities on the blockchain.
Leave your comments below, and reach out to me if you have any questions.
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Written by Cryptonalyses

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I’m a blockchain analyst and researcher. I write about projects and break down complex blockchain terms and processes for anyone to read and understand.