Properly researching cryptocurrency projects before investing in or trading them is a great way to avoid any nasty surprises and minimize your risk. There are a number of effective research methods that are commonly employed, depending on the type of project you are interested in investing in and your own investment strategy. One of the most common is on-chain analysis.
On-chain analysis involves using blockchain data, which is open to anyone when it comes to decentralized cryptocurrency projects, to find out more about how the project operates, and more importantly how investors feel about it. This information can then be used to determine whether a particular project is a good investment before you part with any of your spare cash.
In this AAG Academy guide, we’ll explain what exactly on-chain analysis involves, the benefits it can bring to your research strategy, and how you can use it when trading cryptocurrency.
Fundamental, technical, and on-chain analysis are the three most common research methods used by traders and investors. What is unique about on-chain analysis is that, unlike the others, which can be used for cryptocurrencies as well as various other securities, it is only applicable to cryptocurrencies. That’s because on-chain analysis relies on open blockchain data.
The majority of today’s cryptocurrency projects are decentralized and operate on a public blockchain. This provides complete transparency and allows anyone who is interested the ability to view a project’s ledger, which shows every transaction that has ever taken place. We can also see all the wallets that hold that particular cryptocurrency — and how much of it they contain.
There are a number of tools you can use to conduct on-chain analysis, many of which offer some or all of their features for free. Here are some that are worth a look:
These tools take care of much of the hard work for you; they have the ability to display important data like the number of active wallet addresses holding a particular cryptocurrency, the circulating supply, on-chain activity levels, and lots more. They can also show you other fundamentals, like an asset’s historic value and how it has changed over time.
All of this data is available publicly, so if you wanted to, you could manually examine an on-chain cryptocurrency project and collect all the information you wanted by yourself. You would also need to compare it yourself, however, which is why tools like these — which compile everything for you and display it in an easy to read format — are so helpful.
Bear in mind, however, that it is up to you to interpret this data and recognize not only what’s important to your trading strategy, but how to use it to your advantage.
If you’re a seasoned cryptocurrency trader, you will have almost certainly been burned by investing in bad projects in the past. Almost all of us have made this mistake at some point, particularly early on in our trading careers. But with on-chain analysis and proper research, you can greatly minimize the chances of that happening by making more informed decisions.
On-chain analysis can tell us many things about a certain cryptocurrency, but there are two key aspects traders will be particularly keen to know. Those are coin or token distribution and trading activity. The first can help us avoid projects for which a small number of wallets hold the majority of circulating supply, and therefore have too much control over a project’s value.
Trading activity can help us understand how popular a project is, as well as how other investors have reacted to certain market conditions in the past. It’s a bad idea to invest in projects that are mostly being ignored by other investors, since it’s unlikely their value is going to rise any time soon. More popular projects that see plenty of support are going to be much more reliable.
Furthermore, when you can see past trading activity, you can make better predictions about how a cryptocurrency’s value might change going forward. If a certain event, such as a product launch or the threat of regulation, has triggered a sharp rise or fall in value in the past, there’s a good chance the same effect will be repeated when a similar event occurs in the future.
On-chain analysis can also tell us about the cryptocurrency industry as a whole. If you’re not sure what to invest in, looking at where other investors are putting their money and which projects are currently most popular may prove useful.
As we touched on briefly in the section above, on-chain analysis can point to notable trends and activities that may impact the value of a particular cryptocurrency or the industry as a whole. Therefore, it can be very beneficial when it comes to making sensible investment decisions and minimizing your risk. What’s more, on-chain analysis uses only concrete data.
Rather than relying on forecasts and expectations made by others, on-chain analysis looks at what has already happened to a particular cryptocurrency or market. You can be sure the data is confirmed and reliable, thanks to the open nature of the decentralized cryptocurrency industry, so you reduce the possibility that you will be caught out by unforeseen activities.
So, how exactly do you use on-chain analysis for trading? In a nutshell, it can be used just like any other trading tool. When the data indicates that a cryptocurrency is experiencing a period of increased activity or its price is set to rise, it may be a good time to buy. When the data indicates that a project has seen large sell-offs or its value will fall, it may be a good time to sell or avoid it.
Like any analytical research method, on-chain analysis can be incredibly useful, but it has its limitations. The most important of which is that while it provides access to a wealth of invaluable data, it is just that: data. There are lots of other factors that can affect cryptocurrency prices that on-chain analysis cannot take into account, such as recent events that may affect markets.
For instance, on-chain analysis by itself may suggest that it is a good time to invest in a particular cryptocurrency because historic trading data points to an imminent price increase. However, an outside factor, such as an upcoming change to the way the project operates or an unforeseen economical issue, could mean that the analytical data is largely irrelevant.
With that being the case, on-chain analysis, like other research methods and trading tools, should not be used exclusively; it should form part of a broader trading strategy that also takes other factors into account.
On-chain data consists of all the publicly available information on a decentralized blockchain. This includes a complete ledger that shows every transaction that has ever occurred, as well as information on which wallets hold a particular cryptocurrency — and how much of it.
Off-chain data includes any information that cannot be found on a public blockchain. This includes off-chain transactions confirmed outside of the main network.
There are five sources we recommend for on-chain data: Dune Analytics, GlassNode, IntoTheBlock, Messari, Nansen.
For more helpful guides on cryptocurrency trading strategies and the all things web3, be sure to check out the growing AAG Academy.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.
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