On-chain Analysis: What is it and Why Would You Use It?

On-chain analysis is a methodology that is unique to the cryptocurrency market. Its purpose is to explain the behavior of investors and predict the change in price of an asset by utilizing blockchain data.

Why is it Necessary to Do an On-chain Analysis?

On-chain analysis is a relatively new field of study that, in contrast to the more established fields of technical and fundamental analysis, does not have a lengthy history or a well-established theoretical base, but is instead continually expanding and evolving.

Researchers who do on-chain analysis make use of a standard collection of metrics concerning bitcoin addresses and holders, transactions, and network fees.

The number of active users, which can be regarded as users who have done at least one transfer within a specific amount of time, is one of the signs that a lot of people look at. If a certain cryptocurrency is experiencing an increase in the number of active addresses and transactions, this may be a hint that its price will soon begin to rise.

It’s possible that blockchain will exhibit other indicators of this tendency. Over instance, bullish sentiment can be inferred from an increase in the fraction of long-term investors among all coin holders. Long-term investors are defined as individuals who have not transacted with their funds for an extended period of time.

Where and How Can One Do an On-chain Analysis?

Not only can traders and investors enhance their own trading strategies with the assistance of on-chain analysis, but they can also gain a better understanding of what the movements of the market may be like in the short term.

The addresses in the cryptocurrency network are separated into different groups based on their activity, and the change in the share of each group is represented on the timeline by the so-called Hodl Waves (HODL Waves). This is one of the fundamental on-chain indicators. You are now able to determine, as a result of the Hodl-wave indicator, whether investors are betting on an increase in the price of a coin or are selling it off because they believe it will experience a decline in value.

It is not a good idea, according to industry professionals, to make conclusions just on the basis of on-chain measurements or indicators; rather, it is important to comprehend the context of a specific cryptocurrency asset. It’s possible, for instance, that the vesting conditions for large investors are to blame for the high share of long-term holders of cryptocurrency, rather than the expectations of investors.

In what ways may on-chain analysis contribute to the battle against financial crime?

On-chain analysis is utilized for a variety of purposes, including trading and investing, as well as for compliance with anti-money laundering (AML) legislation, specifically for the purpose of identifying stolen cryptocurrency.

Any company or application that accepts payments through blockchain addresses, such as cryptocurrency exchanges, is required to filter incoming transactions from users to check for the presence of “dirty” assets. This includes both fiat and cryptocurrency transactions. Specialized services such as Chainalysis and Crystal both offer services that are comparable to those offered by them.

These types of algorithms do an automatic check on all incoming transfers and, as a result of the public nature of the blockchain data, are able to identify transactions that are tied to illegal activity. Verification methods, also known as Know Your Customer (KYC), and customer due diligence, also known as CDD and EDD, make it possible to determine the identities of criminals and associated persons.

What Kinds of Services are Available for Doing the Analysis?

At this time, there are a number of well-known platforms that offer on-chain analysis tools; more specifically, these platforms offer APIs and visualizations of blockchain data:

• Nansen. The investigation of the Ethereum blockchain will be the primary focus. It does its own research on the cryptocurrency market and publishes the results.
• Dune Analytics. A platform with the capability to construct individualized dashboards that visually represent a variety of different on-chain KPIs. Creates a community in which its members regularly discuss their observations with one another.
• Glassnode. Another well-known service that gives users the opportunity to examine typical charts at no charge.