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The public nature of blockchains continuously generates an endless stream of data, as every single transaction and address leaves a clear trace. This information, known as chain data, provides a way to accurately analyze the cryptocurrency’s network activity.
Some on-chain indicators like number of active addresses, HODL wave, and hashrate have become well known in the industry, but the general public is only scratching its surface.
As the number of available on-chain metrics has grown to a huge amount, figuring out which ones are most useful for the average investor has also become a task. A good place to start is with Medium Exchange Deposits, ‘Sent By’ Bitcoin addresses, and Miners to Exchanges indicators.
Average currency deposits
There is usually some confusion when analyzing the inflow and outflow of an exchange. Buyers do not need to withdraw funds after buying cryptocurrencies and the same can be said regarding inflows as the funds could be dormant for quite some time before any trade takes place.
Average Bitcoin Exchange Deposits. Source: CQ.live
A better way to quantify this flow is to measure the average deposit size. As shown in the graph above, each peak size in average deposits coincides with a local Bitcoin price low. This movement could be a trace of a great crypto whale capitulating and cutting losses.
Such an indicator is especially true during a long-term downtrend. As mentioned above, on-chain indicators should not be analyzed in total isolation. The capitulation could only occur after several months when the price fails to show strength.
Bitcoin addresses “Sent from”
Instead of measuring the active number of addresses, the 7-day average of the “Sent by” address metric provides a clearer view of network activity. This dramatically reduces the noise of exchange picks and double counting from mixing services.
Bitcoin’s daily active source addresses. Source: BitInfoCharts
Notice how each major spike in addresses sent by daily media coincides with the short-term high of the local Bitcoin price. Those sudden spikes in coin holders moving coins indicate short-term unease, although this isn’t necessarily indicative of a change in the market trend.
Again, this indicator should not be interpreted without recognizing market trends. One such case occurred during the April to July 2019 rally when the metric rose twice, signaling a cooling period even as prices continued to rise a few weeks later.
Miners at the exchanges
glassnode provides another detailed view of Bitcoin miner transfers to exchanges. There were 1,800 BTC mined per day on average prior to the May halving and this figure has now been reduced to 900.
While exchanges aren’t necessarily the only way for miners to dump their position, it is by far the best yardstick for assessing their short-term price expectations.
Miners transfer BTC to exchanges. Source: glassnode
The 7-day moving average chart above shows that that flow has been drastically reduced around Bitcoin’s halving and the figure has remained at its lowest levels in 12 months.
Meanwhile, Bitcoin remained relatively stable at $ 9,800, failing to break out of the $ 10,000 mark. The reduction in the transfer to trade can be interpreted as a somewhat bearish indicator.
This stance accumulated by miners who refuse to sell could be a potential catalyst for a more substantial downside, should Bitcoin’s price not be able to sustain higher levels. Unlike open interest futures contracts, where short sellers are liquidated when the market moves higher, no such effect would occur as the amount of BTC held by miners increases.
On-chain data helps dampen investor bias
Chain analysis is not an exact science as trading is inherently a human driven activity, at least for now.
When faced with mixed signals, investors tend to rationalize and exclude those who are not aligned with their mindset and desires.
As discussed earlier, there is a lot of noise in the market, but on-chain analytics can help investors separate the signal from all the annoying noise.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your research when making a decision.
