Blockchain data analysis is a powerful method to dissect the truth about blockchain activity from market noise. Crypto assets are often mispriced, and blockchain data analysis has a way to discover a crypto token’s “real” value.
So, you signed up for a TradingView account and may have subscribed for the premium version. You’d think this is all you need to be successful at investing in crypto. Unfortunately, you’ve only unlocked one superpower — market pricing analysis, and TradingView is good at that.
What you’re still missing is insight to the underlying blockchain activity from a thorough blockchain data analysis. Fortunately, on-chain data, such as total wallets created, transactions, smart contract activity, tokenomics and even governance decisions are highly accessible as they come from public blockchains.
If you limit yourself to price action, you may have part of the information. Price action is usually the result of a collective agreement on what factors (including on-chain data) imply for the future of the project. So, let’s dig into what you can know about blockchain data.
Is the network or platform being used at all?
Before investing in a company, it’s necessary to know if the products or services that the company offers are useful now and in the future. It’s so easy to create a token nowadays, and with the Cosmos SDK, it’s becoming easier to create an entire blockchain.
But a blockchain is just a piece of technology for storing data. It’s probably overkill to use blockchain as a way to store the leaderboard of an online single-player Tetris game. The marketing team of that project could also make up a story about how each token provides utility to buy NFTs at the Tetris NFT marketplace.
You can put on your detective hat and see how many transactions are actually being made on that blockchain, or how many transactions use the tokens. On-chain analytics platforms like Arkham Intelligence can provide the answers.
They can clue you in on whether transactions are genuine. Are they coming from a large community, or are they both transactions designed to manipulate, to give the impression that the creators have made something valuable.
Blockchain data about exchange inflows and outflows
While most newbie investors and day traders use exchanges like Binance and Coinbase, the long-term investors with larger amounts of crypto often move tokens to and from exchanges. The event after the collapse of the now defunct crypto exchange FTX has triggered a fear that storing crypto on exchanges could lead to similar losses.
That fact makes this on-chain data even more reliable. When big holders (think institutional investors) know something the retail investors (the rest of us) don’t know, they tend to begin off-loading their risks by preparing to sell. The only way they could cash out effectively is through exchanges.
So, when exchanges experience a sudden inflow of crypto, a large selling event may be looming. Inversely, when exchanges experience a sudden outflow of crypto, long-term investors are very confident about the future, such that they’re willing to get their coins off exchanges onto a more secure and less inaccessible location (such as a hardware wallet or cold storage).
Blockchain analytics platform Chainalysis has a free resource for looking into Bitcoin’s exchange inflows / outflows, as you can see below.
Total value locked (TVL) with on-chain analytics
Total value locked refers to the value of crypto tokens that are locked or staked in a smart contract. Locked tokens are used for a variety of purposes. Proof of Stake networks like Ethereum, Solana, and many modern blockchains, require blockchain validators to deposit a large sum of tokens as a sign of commitment to properly secure and keep the chain operational.
A decentralized exchange requires someone to create a liquidity pool using their own crypto that is locked in a smart contract. The pool can then be used by traders to make instantaneous swaps. But we also have to be very careful when looking at TVL.
Other platforms have neither a blockchain for validation nor a liquidity pool, and still encourages users to “stake” (a misnomer intentionally used for something as simple as depositing crypto for unclear reasons).
New projects can boast TVL for market purposes, but looking at the TVL alone is not enough indicator for real value. TVL can actually be engineered by locking in a “utility token” with a set minimum price in the market.
True TVL contains useful cryptocurrencies that have stood the test of time. Take ETH, for example. ETH is a common token to be included as part of the TVL for DeFi platforms, and a good indicator that the platform is highly integrated with the general Ethereum ecosystem.
It’s also useful to combine the knowledge of TVL with on-chain activities relating to that token. Has the token interacted with smart contracts of other platforms, or even across blockchains? Is it being held by profitable crypto wallets? Again, on-chain data analytics tools can help sift through the noise and reveal the nugget of truth about a crypto project’s value.
The takeaways
The three pieces of blockchain data that we learned — transaction activity, exchange outflows and inflows, and the total locked value — are just the tip of the iceberg. However, you can already start experimenting with seeing the patterns and correlations that connect these on-chain data with price action.
Want the full picture of the crypto world? BlockCircle’s team is excited to release a web platform where you can gain a unique insight into blockchain and market activity. Furthermore, with a monthly subscription, you can gain access to a Discord community of crypto traders coming from some of the most respected and skilled groups of analysts, quants, and long-term investors.
