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Bitcoin’s own Blockchain hints at where the price may go

On-chain analytics tools look at Bitcoin's historical transaction data to reveal certain patterns and trends that can help us gauge the market sentiment.

Posted May 24, 2024
Last updated May 26, 2024

bitcoin price article cover
bitcoin price article cover

Bitcoin investors often employ what’s known as technical analysis to try to predict the market. Technical analysis is a tool that uses primarily historical price movements. By looking at the Bitcoin price chart, along with the moving average, you may spot a few trends and can easily see on which points prices tend to rebound.

In hindsight, everything is clear. In reality, technical analysis has its shortcomings, and may not even be suitable for a longer term timeframe. There’s always that saying — past price performance doesn’t guarantee future outcomes. For Bitcoin, we need to look at something else apart from the price.

Introducing Bitcoin’s on-chain data

Bitcoin is a wonderful asset class for many things. One of which is the fact that the network has live 24/7 financial reporting of its own trading activities, including how profitable each coin holder is, and for how long they have been part of the Bitcoin economy.

All the data is collectively known as on-chain data and the study of which is called on-chain analytics.

No other asset class does this. Stock investors have to wait every quarter for the latest financial report. There are no up-to-date prices for property value, so property investors could only guess at how much they should sell their assets for.

On the other hand, Bitcoin investors have been blessed with more than a decade of transaction data that is publicly available for anyone anywhere.

In fact, there’s actually an overwhelming amount of data — there is about 600 GB of Bitcoin blockchain data as of May 2024, and the number will constantly grow.

On-chain analytics tools

Even if someone were to download half a terabyte of raw data, there’s still going to be a lot of work to process the data into something meaningful that can offer insights.

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Luckily, there are services that offer on-chain analytics tools such as Glassnode, LookIntoBitcoin, IntoTheBlock, and Santiment, to name a few.

As a data analyst for Easy Crypto, I’ve used them before, and subscribed to a couple of them. Personally, I feel comfortable using Glassnode for their excellent collection of Bitcoin-focused dashboards and configurable charts.

Anyway, I highly recommend you to try every single one of them as everyone’s research needs are different. The ones I mentioned above offer a free tier and a free trial on their premium tier.

What can we learn from Bitcoin’s on-chain data?

Whichever on-chain analytics tools you’ll end up using, you’ll expect these basic on-chain data to show up in their dashboard:

Whale activity

Whales are Bitcoin wallets that belong to individuals or entities (i.e. businesses or organisations) that hold significant amounts of Bitcoin.

Whales are watched closely because their actions can influence the market. For example, if a whale decides to sell a substantial portion of their Bitcoin holdings, it can cause a sharp drop in the price due to the increased supply. Conversely, if they buy large amounts, it can drive the price up.

Coin age

Coin age is measured by how long ago a piece of Bitcoin has last moved. Coin age helps us understand the behaviour of long-term holders versus short-term traders.

If coins that haven’t moved for a long time (high coin age) start to move, it may indicate that long-term holders are beginning to sell, which could signal changes in market sentiment.

Realised value

“Realised value” (or “realised market capitalisation”) is a metric that provides an alternative view of the market capitalisation by considering the value of each coin when it was last moved rather than its current market value.

By tracking realised value, we’re able to know whether or not a Bitcoin holder is experiencing profit or loss, and by how much.

Exchange net flows

Exchange net flows refer to the movement of Bitcoin (or other cryptocurrencies) into and out of one or more exchanges. Net flow is calculated as the difference between the total amount of assets deposited into the exchange and the total amount withdrawn over a specific period. 

Positive net flows indicate more assets are being deposited then withdrawn, hinting that holders are preparing to sell.

Since there’s a noticeable time gap between depositing coins and selling them on exchanges, on-chain analysts can signal a possible downward trend in the price of Bitcoin.

Publicly known data

The three datasets I mentioned above are all publicly available, but they aren’t so easy to extract using day-to-day devices. However, some on-chain data are more “publicly known”, and you may have come across them before on sites like CoinGecko.

Things like coins in circulation, market capitalisation, mining difficulty, and of course, the price of Bitcoin are metrics that many people have easy access to.

The takeaways

On-chain analytics can help us gauge the overall sentiment of the market, however it should not be used for short-term trading or “timing the market”.

For these, you should use technical analysis, and use it well. Using a longer-term investment technique, such as Dollar Cost Averaging (DCA), in conjunction with on-chain analysis is generally a good strategy because of two reasons.

One is that you’re not counting on a single instance in which you buy or sell your Bitcoin. The other is that there is still some element of timing based on the current market sentiment.

Further reading: Explore more topics on all things crypto.

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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.

Last updated May 26, 2024

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