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Fundamentals of on Chain Analysis

On chain data is the data generated by the blockchains themselves. The more mature a chain of blocks, the more reliable the data extracted. The bitcoin blockchain generates thousands of data in real time that allows us to access more accurate and reliable information in a way unthinkable in the traditional financial market of banks and corporations. This data is called on chain data.

What is on chain data?

On chain data is the data generated by the blockchains themselves. The more mature a chain of blocks, the more reliable the data extracted. Bitcoin is the cryptocurrency with the greatest wealth of information, with data from almost 14 years of history to extract and correlate.
This type of analysis differs from technical analysis in that it has a greater correlation with fundamentals than just price dynamics. Prices also appear, but associated with other data.
In the on chain analysis we can visualize, for example:
  • Number of Transactions on the Network
  • The History Since the First Block
  • Miners' wallets
  • The Accumulated Rate in Each Block
  • Amount of Bitcoin at Each Address
  • And Much More
All this information can be used to understand market sentiment, see how investors are behaving, correlate with other movements and try to project this same past behavior into possible future price movement.

Some indicators

1. RHODL ratio: Compare the amount of bitcoin held for one week with 1-2 years. When this rate gets high, it means there are a lot of short-term holders and the market is perhaps overheated or overbought. It means that many holders are recent and that perhaps they arrived in the excitement of the price increase and nothing guarantees that they will hold for the long term.
2.MVRv-z: It compares the current market capitalization with the realized value, i.e. when people made the most profits. This indicator measures when each bitcoin last moved, takes the price for that day and plots an average. When the market value is above the value at which people make the most profits, it means that the price is overheated or overbought, when it is much lower, it is oversold, that is, it is cheap.
3.SOPR (spent output profit ratio): When people are selling at profit or loss. If people are selling at a loss they are scared, they are capitulating because of some news or event. It helps to feel the market sentiment and see if the negative news is affecting investor behavior.
There are many other indicators like NVT, Hash Ribons, Puell Multiple, Booking risk, balance in whale wallets or exchanges and many more. On chain data is a world of its own that helps us not to be so susceptible to news but to look at what investors are actually doing.

Limitations of on Chain Data

There are also limitations. With more Layer 2s being integrated into protocols, on chain analysis can affect its accuracy over time, making motion expectations even longer.
In addition, many different metrics can bring divergent information and it is necessary to know how to differentiate which information makes sense at that moment and what is noise. Another point is that this type of analysis is very recent, the indicators are still being validated and tested, many have emerged since 2019.
Therefore, although on chain data is excellent for giving us a perspective on the market's progress, we should not rely solely on this type of analysis to allocate capital to an asset.
This article was published by the Anti Research Team