On-chain analysis refers to the use of a set of metrics on a blockchain to determine the network’s activity and status. The information on which these measures are computed includes data about transactions, addresses, miner’s activities and other metrics, such as fees and rewards, that can provide valuable information about how the network is being used. By examining key metrics and ratios it is possible develop a better understanding of the market’s supply and demand dynamics. With this knowledge, it is easier to identify investment opportunities and changes in cryptocurrencies price and take actions.
Examples of on-chain metrics
We will now explore some of the most considered metrics, referring to Bitcoin specific case.
- Active Addresses: active addresses refers to the number of unique addresses that are transacting on the Bitcoin network. This metric can provide insight into the level of adoption and usage of the network. An increase in active addresses can suggest growing interest and participation, which may have a positive effect on the cryptocurrency price.
- Transaction Volume: transaction volume measures the total amount of Bitcoin that is being transacted on the network. This metric can provide insight into the level of demand for Bitcoin; an increase suggests gowing attention and use of Bitcoin, which may positively affect its price.
- Velocity: velocity is a metric that measures the rate at which Bitcoin is changing hands between users. It is calculated by dividing the total transaction volume on the Bitcoin network by the average amount of Bitcoin held by each user. A high velocity may indicate that Bitcoin is being used frequently and changing hands quickly, which is a positive sign for the network’s health and adoption. On the other hand, a low velocity may suggest that the cryptocurrency is being held more as a store of value rather than being used for transactions, which could potentially lead to decreased network activity and adoption.
- Hash Rate: hash rate refers to the computing power that is being used to secure the network. This metric provides insight into the overall health and security of the network; a higher hash rate suggests a more secure network.
- Miner revenue: miner revenue is the total amount of revenue earned by Bitcoin miners from mining rewards and transaction fees. When miner revenue is high, it may indicate there is significant demand for transaction processing on the network; on the other hand, if miner revenue is low, it may suggest that mining is becoming less profitable.
- Stock-to-Flow Ratio: the stock-to-flow ratio compares the total supply of Bitcoin (the stock) to the annual production rate (the flow). This ratio can provide insight into the scarcity of Bitcoin and its potential value. A higher stock-to-flow ratio suggests a more scarce asset, which may produce an increase on its price.
- MVRV Ratio: the MVRV ratio compares the market value of Bitcoin to its realized value. Realized value is an estimate of the cost basis of all outstanding Bitcoins. This metric indicates whether Bitcoin is currently overvalued or undervalued: an MVRV ratio above 1 suggests that Bitcoin is overvalued, while a ratio below 1 suggests that it is undervalued.
- Puell Multiple: the Puell Multiple compares in a ratio the current Bitcoin mining rewards to their historical average. This metric can provide insight into whether Bitcoin miners are selling their rewards or holding onto them. An increase in the Puell Multiple suggests that miners are selling, which may put downward pressure on Bitcoin’s price.
It’s important to note that the metrics mentioned above are just a few of the many possible indicators that can be used to analyze Bitcoin’s performance. However, because the Bitcoin blockchain is transparent and all transactions are publicly recorded, anyone who is willing to analyze the data can gain valuable insights into the network’s health and activity.
Conclusion
To sum up, on-chain analysis is a useful tool for investors looking to gain a deeper understanding of the Bitcoin network’s health and activity. However, it’s important to note that on-chain analysis is just one “piece of the puzzle”; this analysis should be merged with other considerations and an outlook of the crypto market, considering macroeconomic factors and industry news, in this way Bitcoin market and its potential movements can be more understandable.
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