OCT 19, 2023
Introduction to On-Chain Analysis
by ZIBAH, CopyChain Crypto
Successful cryptocurrency investing requires on-chain analysis, which is derived from the fundamental characteristics of blockchain technology. With the use of on-chain analysis, we can gain a powerful understanding of real-time events occurring on a blockchain network. At the end of this article, I believe you will have a great understanding of on-chain analysis.
Blockchains use distributed ledger technology to operate. Distributed ledgers allow all transactions to be broadcast over the network, and anybody or everybody has access to an entire record of all transactions. Every transaction is broadcast to a set of node operators and maintainers, preventing any single point of failure inside the network.
This technology was first used by Bitcoin to address the "double spend problem". Because every block in the Bitcoin ledger was dependent on the one before it, bad actors could not alter the contents of one block without also altering every block that came before it. This gave the Bitcoin ledger the property of immutability.
Compared to traditional financial markets, traders and investors will have unprecedented access to information—including the ability to track every trade, deposit, and interaction by and between every entity—thanks to this distributed, immutable ledger that is auditable by both outside parties and network participants. Because of this, traders that effectively utilize on-chain analysis have a big edge over other traders.
These sets of information recorded on the blockchain are called on-chain data, and it's safe to say that there's no on-chain analysis without on-chain data.
What is On-Chain Data?
All verified information and transactions that are stored on the blockchain are referred to as "on-chain data". Public blockchain cryptocurrency data (transactions) are publicly available, unlike other asset classes, which makes them a good fit for data analysis. Users can use block explorers such as Solscan, Etherscan, BscScan etc. to view publicly available on-chain data, which can be used to predict future price fluctuations.
On-chain analysis, another name for blockchain data extraction and analysis, is a simple process. This extensive, publicly available financial data can provide everyone with insightful knowledge on market patterns, investor trades, and behaviour.
Three main categories can be used to classify the data broadly:
1. Transaction data (such as the sender and recipient addresses, the amount transferred, and the amount that remain in a specific address).
2. Block data (time stamps, incentives, and miner fees).
3. Smart contract code
A key tactic for maybe making money in the market is to continuously monitor and track it. While technical and fundamental analysis can shed light on different market movements, gathering information through on-chain analysis gives a bird's-eye perspective of the blockchain. We'll go into the definition of on-chain analysis in this article and show you how to use it to your advantage to increase your revenue and improve your trading experience.
(Do well to watch the explainer video at the end of this article for easy understanding, or you can click here if you want to go to the video directly)
What is On-Chain Analysis?
The process of analyzing data from a blockchain ledger to ascertain market movement is known as "on-chain analysis". Put differently, tracking the flow of money on the blockchain is part of on-chain research, which helps identify possible investment opportunities. It is exclusive to the cryptocurrency industry because other asset classes don't use open ledgers. For example, you can do an on-chain study to find out why different market players acquire or sell a particular item.
By looking at blockchain transaction activities, on-chain analysis can identify new patterns and investor sentiment, as well as how investors respond to events and market pressures. On-chain analysis, to put it simply, is tracking the flow of money through the blockchain in order to identify prospective opportunities.
More precisely, on-chain analysis entails examining transaction data and cryptocurrency wallet balances—two factors that come in handy when attempting to determine whether or not to make an investment.
Here's a hack: Ultimately, it's probably not a good idea to invest in a token if it's not being traded by anyone and the majority of its supply is owned by a small group of powerful holders known as whales.
Purpose of On-Chain Analysis
On-chain analysis is used for so many research purposes. Here are some prominent ones:
1. On-chain analysis is used to check for active wallets trading a particular cryptocurrency.
3. On-chain analysis is used to check transaction volume in a crypto market.
4. On-chain analysis is used to check for the supply distribution of a coin or token.
5. On-chain analysis is also used to check for profitable wallets used in copy trading.
6. On-chain analysis is used to check for the viability of a cryptocurrency, obtain essential details about it, and prevent falling for rugs.
Are There Limitations to On-Chain Analysis?
The way that any methodological approach works is how on-chain analysis works. The conclusion is stronger with more data provided. This is something that on-chain analysts need to know, as many of the measures that are used today can be obsolete in the future when new data becomes available. Data's time window is also another fundamental constraint.
What is the Future of On-Chain Analysis?
As the data collection develops, on-chain analysis becomes more reliable. In summary, on-chain analysis will become more trustworthy as more data becomes available. Owing to its dependence on datasets, it is an ideal use case for machine learning. In the future, on-chain analysis will become more and more proficient as access to larger and larger data sets increases.
For investors, on-chain analysis continues to be a very useful tool that is exclusive to blockchain technology and cryptocurrency assets. The distributed ledger technology upon which these systems are based gives investors an aerial perspective of the movement of liquidity. A clear break from traditional finance is brought about by this new era of openness, and Copychain Crypto offers the roadmap / guidance to fully take advantage of this vast data landscape.
The next two contents will be deep dives into on-chain analysis and copy trading in CeFi and DeFi systems (talking about how they work together in helping you stay profitable while copy trading). Once we're done with that, we will enter research proper. Do well to check out the next posts, cheers.
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