Five on-chain indicators that investors should follow: Chainalysis

Analyzing cryptocurrency markets may seem easier than traditional markets because blockchain technology has greater built-in transparency, allowing anyone to analyze and control data on-chain.

At the same time, however, there are challenges to focus on forward-looking numbers that provide insight into current and future price trends. Philip Gradwell, chief economist at blockchain intelligence firm Chainalysis, joined CoinDesk earlier this week to discuss the five on-chain indicators to monitor for all traders.

“The first indicator I look at every day is the influx of trade,” Gradwell said.

Investors typically transfer coins from their wallets to exchanges when they want to liquidate their holdings, and take their holdings directly into custody when they have a bullish view on cryptocurrency.

An increase in inflows in a growing market could be seen as a sign that investors are not confident in the uptrend. “When you see large influxes, it’s time to be cautious,” added Gradwell.

Read also: Bitcoin risks a deeper price decline when stock market inflows rise

However, the inflows do not imply immediate liquidation. Investors can keep their coins on the stock exchange for as long as they want.

“Historically, coins have been liquidated with a 12 to 36 hour delay,” Gradwell said, adding that there were panic sell-offs during the March crash.

So, this indicator is just one piece of the puzzle because we don’t know when the transferred coins will be sold. Furthermore, an increase in inflows or sales pressure is often accompanied by equal or more substantial buying pressure.

To determine the impact of stock market inflows on the supply side, investors should keep an eye on the demand side with the help of the “trade intensity” metric, which measures the number of times a coin enters is exchanged.

“It tells us how many people are willing to buy bitcoins sent to exchanges,” Gradwell said. An increase in trade intensity shows that buyers are outpacing sellers and is a sign of the trend’s strength.

On Wednesday, Bitcoin jumped more than 7% to 15-month highs above $ 12,300. Amid the price rally, cryptocurrency exchanges monitored by blockchain intelligence firm Chainalysis received a total of 106,519 BTC on Wednesday, the highest daily inflow since October 2.

However, the increase in inflows did not hold back the rise in prices as demand was strong. Bitcoin’s trading intensity jumped to a two-month high of 5.8, more than double the 90-day average.

Also Read: Back at $ 13K: Bitcoin Unfazed by Profit Takers After Rise to 2020 High

While currency inflows and trade intensity help gauge short-term market conditions, the remaining three indicators are more about long-term trends.

Investors can buy cryptocurrencies with fiat currencies like the US dollar or use dollar-backed stablecoins as a tether to fund purchases.

Cryptocurrency to fiat exchanges facilitate the exchange of dollars for cryptocurrencies, while in cryptocurrency to cryptocurrency exchanges, stablecoins are used as a gateway for cryptocurrency trading.

Investors can determine whether the market is led by legal buyers (such as institutions) or by binding traders by tracking the net flows between these two types of exchanges.

The net flow from crypto-fiat exchanges to crypto-crypto exchanges suggests that the market is dominated by stablecoin traders. In this scenario, an increase in stablecoin issuance could be seen as a leading indicator of an impending price hike.

However, this too is not set in stone. Since March, crypto exchanges have received 206,000 BTC from crypto exchanges, according to Chainalysis. “It indicates that fiat buyers have primarily led the market,” Gradwell noted, adding that the data confirms the bullish narrative of growing institutional holding in the major cryptocurrency.

Investors can measure hodling sentiment in the market by tracking the number of liquid and illiquid entities – groups of addresses controlled by the same participants in a network. Chainalysis identifies entities by analyzing blockchain transaction patterns to identify which addresses are controlled by a single person or company. This provides a more accurate picture of what is happening as the data better reflects actual holdings and transfers between individuals and businesses, reducing the noise of cryptocurrency internal movements.

Liquidity is the average ratio between the net and gross flows of an entity’s assets over the life of the entity, across all addresses controlled by the entity. Chainalysis defines a liquid entity as one that sends on average at least 25% of the assets it receives, while an illiquid entity is one that sends less than 25% of the assets received.

Essentially, an illiquid entity is one that appears to believe in the long-term prospects of cryptocurrency and hoard coins. This has a weakening effect on the selling pressure in the market. For this reason, a sustained increase in the number of illiquid entities is a sign of strong hodling sentiment and a bullish indicator.

The chart above shows that bitcoin liquidity has fallen to its lowest level since mid-2017. Bitcoin’s soaring $ 5,000 to $ 20,000 growth occurred in the last quarter of that year.

Furthermore, the amount of illiquid bitcoin has increased significantly. “This year it has increased at a faster rate than before. So you have more investors than ever. But there are also fewer bitcoins that are liquid and available for purchase than in the past, ”Gradwell said.

This is perhaps why bitcoin has recently held steady above $ 10,000 despite BitMEX allegations, the KuCoin hack, the OKEx private key drama, US President Donald Trump’s health fear and a sell-off in the global stock market.

Value transfer refers to the US dollar value of the total units on a blockchain that are transferred on a given day. It essentially represents the use of the blockchain and is accompanied by an increase in the transaction count.

“When there is greater use of a cryptocurrency there is more demand and that drives the price up,” Gradwell said.

Ether’s value transfer began to rise sharply in mid-July. A week later, the cryptocurrency garnered strong supply around $ 250 and ended up climbing to $ 470 in mid-August. Ether led the broader market higher in July and August and outperformed bitcoin by increasing 53% and 26% respectively.

Until last year, bitcoin practically led the broader market both up and down. Most investors bought ether and other alternative cryptocurrencies during bitcoin’s bull run and sold those other cryptocurrencies when bitcoin was in a recession.

However, the dynamics have changed this year with the explosive growth of Ethereum-based decentralized finance protocols, making it imperative for investors to monitor the on-chain activity of ether and other coins.

As cryptocurrency markets continue to grow and mature, the demand for deeper insights into the chain is likely to increase. “With on-chain data, there’s a lot of work that needs to be done first, to move from raw blockchain concepts like an address to a more meaningful economic concept like flow in an exchange. But once that’s done, the ‘user has a meaningful data set to act on and make decisions on, ”Gradwell said.