Learn how to use on-chain data to analyze cryptocurrencies and make smarter investment decisions.

Introduction

The cryptocurrency industry is notoriously tricky to navigate. Even if you’ve managed to avoid rug pulls, hacks or exploits, picking the right cryptocurrencies to invest in is extremely difficult. The pace of innovation and development makes it challenging to identify high quality projects that will do well in the months and years ahead.

So, how do you “do your own research” in an industry that’s rife with risk and noise for investors?

Most crypto investment decisions start with the same process traditional equity investors use. You’ll look at the team, read their whitepaper, and look into the tokenomics of the cryptocurrency.

This is a good start, however it’s missing one of the core value propositions that cryptocurrency investing has to offer investors: on-chain analysis.

On-chain analysis allows you to verify claims that a team makes about their token, track what other holders are doing, monitor whether smart investors are buying a specific cryptocurrency, and more, thanks to the transparency that blockchains offer.

In this guide, you’ll learn what on-chain data is, the main on-chain metrics to use before investing, indicators to monitor once invested, and how to use the blockchain to supplement your existing fundamental analysis to make better decisions.

What is on-chain data?

The nature of blockchain technology means that every transaction is recorded in a distributed public ledger, which is immutable and transparent for anyone to see.

The data stored within the blockchain is referred to as on-chain data.

On-chain data can include information such as:

• The sender and recipient wallet addresses

• The amount of funds transferred in a transaction

• The tokens that were transferred

• The transaction (gas) fees the sender paid

  
  

This transparency is a major differentiator for crypto when compared to traditional financial markets. If you know how to access, analyze, and draw conclusions about a cryptocurrency from on-chain data, you’ll have a significant competitive advantage when it comes to investing and trading it.

For example, if a team launching a new token announces that 30% of the total supply is being held in a multi-signature (multisig) wallet, you can verify that yourself on-chain rather than relying on blind trust. 

You can dive into on-chain data using block explorers such as Etherscan for the Ethereum blockchain and Polygon Scan for the Polygon blockchain, or use blockchain analytics tools like Kaivest that decode, aggregate, visualize and enrich the data for you.

There are a range of different on-chain metrics you can use to provide clarity into a token you’re thinking about investing in. In the next section, we’ll look at some of the main ones.

On-chain metrics to analyze a cryptocurrency

Activity levels

The first metric you can track to evaluate a cryptocurrency, especially for blockchains, is the on-chain activity levels.

This allows you to gauge the demand for using a particular blockchain, which typically has a price impact on the native token, providing an indicator of possible price action.

We can use Nansen’s macro dashboard to visualize this. In the screenshot below, we can see how the Arbitrum Layer 2 blockchain saw a huge spike in active addresses and daily transactions on March 23rd, 2023, which was the date of the Arbitrum token airdrop.

Both active addresses and daily transactions remained at a higher level than they were pre-airdrop, which gives us an indication that the token will have a level of strength as people continue to use the L2.

However, there is a downward trend in daily users, which could indicate potential price impacts if the chain fails to retain its users.

Holders distribution

Another useful on-chain metric is the holder distribution of a cryptocurrency.

Cryptocurrencies that are evenly distributed across a large holder base compared to having the supply concentrated across a few larger wallets usually have a price action that’s more natural and have a lower chance of price shocks due to a large wallet selling their holdings.

As well as looking at the holder distribution, consider how long each wallet has held a token for.

You can use Kaivest to quickly see this information.

Once again, we’ll use Arbitrum as an example.

In the dashboard above, we see two things:

• Token Seniority Distribution: If people are holding their tokens for a long time, it’s usually a good sign. A potential buyer can see that other holders have long-term confidence. In the image above, we see that 44% of wallets have held $ARB for at least 90 days, which is a sign of potential long-term strength.

• Unique Addresses for Token: This shows how many total addresses are holding the token. It’s normal for this graph to slow down over time, as once people can buy a cryptocurrency on centralized exchanges (CEXs), these individual holders aren’t shown on-chain. However, a healthy cryptocurrency will usually have a steadily climbing number of unique addresses. 

  
  

This on-chain data helps you understand the stability and long-term growth trajectory of a token and whether it’s in a growth stage, accumulation stage, or in decline.

Smart Money activity

One of the best indicators when evaluating cryptocurrencies is how “smart money” interacts with the token.

Smart money wallets are investors with a large amount of capital and who regularly make trades. These investors typically have good sources of information and lots of experience with crypto investing.

Here’s the chart for smart money holdings of $LDO, the native token for the liquid staking protocol, Lido.

We see that both the number of smart money wallets holding $LDO and the number of tokens held are near their all-time high, so certain investors must have strong conviction.

You could then dig in and see how many tokens each of these entities have and whether or not they’ve added holdings recently.

Smart money tracking is a powerful on-chain data source. If you see that a specific cryptocurrency has a high number of smart money entities invested, it may be a good investment.

We’ll look at this later in the guide, but you can also set up alerts to track these smart money entities and stay up to date on their activity.

Total Value Locked (TVL)

Total Value Locked (TVL) is a helpful on-chain data point for analyzing cryptocurrencies as it tells you how much value is staked or locked in a particular contract, which gives you an indicator of sentiment around the token.

Here’s an example of Uniswap’s TVL over time, with notable events overlaid on the chart:

Source: Uniswap on Defillama

When Uniswap was a newer protocol, the TVL for $UNI increased whenever there was a big event or announcement.

Over time, Uniswap became known as one of the more trusted DeFi protocols in the space, so investors staked their tokens, causing TVL to stay high between 2021 and mid-2022. As the macro environment worsened, TVL dropped as investors lost confidence.

On-chain data like this can help you decide whether it’s a good time to buy or not. For example, if you see that the TVL in a protocol you’re considering has stopped going down and has started to slowly increase, it may be a sign that confidence is coming back.

It’s important to remember that no single on-chain data point can help you make a purchase decision. Look at all of these data points in line with other information such as tokenomics, team experience, recent protocol news, and any other relevant qualitative data that won’t show up on-chain.

Things to monitor once you’re invested

If you’re buying a cryptocurrency to sell for a profit, your on-chain analysis doesn’t stop once you’ve bought it. Now, you need to monitor new data points to help you time your sale to get the best ROI.

Here are some key things to monitor. 

Exchange flows

Exchange flows help you learn about overall holder sentiment.

In most cases, when people move tokens onto an exchange it’s because they want to sell them. On the other hand, when people move tokens away from an exchange into self-custody, it means they’re planning to hold it. There are exceptions to this, but this is the overall trend.

When you notice a large volume of tokens moving to an exchange, it could be time to consider selling, as you can expect downward pressure on the price to happen in the near-term.

Let’s use the meme coin, $PEPE, as an example of how exchange flows can drastically affect price.

On the 5th May, 2023, Binance allowed the token to be traded on the platform. This immediately led to a huge volume of tokens —over 27 trillion — being moved to the Binance on the first day.

Now that the token was available on the largest CEX, more buyers were able to purchase it, which led to the price of the token hitting an all-time high on May 6th, 2023, two days after the listing.

However, the inflow to exchanges continued throughout the month as more holders were selling, which caused the price to drop. There is also a strong chance that existing holders were waiting for Binance to list it in order to “sell the news”.

On more established cryptocurrencies, there may not be large changes in the inflows and outflows, because people can buy the tokens on CEXs in the first place. However it’s still a useful data point to monitor.

If you had been monitoring the inflow of the token we looked at above, you would have been able to pre-empt other holders selling their tokens and take your profits before the downward sell pressure caused you to lose out on profits.

Top holder and smart money transactions

Monitoring how top holders and smart money entities are trading a cryptocurrency you’re holding is another effective way to determine your next actions.

If you see these entities accumulating more of a token, it’s a sign of confidence. If they’re reducing their holdings, it means they’re either taking profits.

In this example, we’re looking at the smart money holdings for $LINK. You’ll see the total balance that each top holder has, as well as the 24-hour and 7-day balance changes.

Top profitable traders to copytrade

When analyzing a cryptocurrency, it can be helpful to see what the most engaged traders are doing with that token. If you identify wallets that are consistently making trades with a high success rate, you can consider copy-trading them on Kaivest.

This shows you which traders have the highest realized gains.

You can click through to each wallet on the list, which will open the Wallet Profiler. Here, you’ll see the timing of the wallet’s buys and sells, as well as their total realized profit.

When you find a wallet that you see is consistently making good trading decisions, you can add them to your watchlist and set up Smart Alerts. Whenever they make a transaction, you can receive notifications in Discord, Slack, or Telegram, allowing you to quickly take action.

Remember: no matter how much profit they’ve made in the past, every trader can make bad decisions. Use these signals in conjunction with your own research and level of conviction in a token to make the best decision.

How on-chain data can supplement fundamental analysis

There are multiple ways you can use on-chain data to add context to other parts of your fundamental analysis when evaluating a cryptocurrency.

Let’s take a look.

Analyze the team

When making an investment decision, you’ll need to consider the team and their track record. You can usually find the core team on the official website, LinkedIn, or find them in their Discord/Telegram.

However, you can supplement this with on-chain data.

For example, if we were considering buying $BLUR, the native token for the NFT marketplace Blur.io, we can use Token God Mode to see the team’s multisig wallet and track their balance.

If you’re evaluating a cryptocurrency and notice that the team wallet is transferring funds out to an exchange, there’s a risk that they are secretly selling their allocation.

Whenever a team does this without being transparent, there will generally be inevitable backlash, pushing your token’s price lower.

Tokenomics

On-chain data helps you verify that a project’s tokenomics are accurate.

Cryptocurrencies with well-designed tokenomics can be a smart purchase. We won’t get into what makes a good or bad tokenomics model, but the key thing we’re looking for is that the team has actually put their tokenomics model into practice.

We can use on-chain data to monitor for token unlocks, as well as see relevant on-chain movements of funds that are in-line with the tokenomics expectations.

Blur’s tokenomics model allocates 18% of the total token to early investors and the team, and this is vested over a four-year period. Using Nansen, we can easily verify if these tokens are still being vested by tracking all of the wallets with the Token Lockup label.

Being able to supplement any information you have on tokenomics from public statements or whitepapers with on-chain data is a powerful addition to your investing toolkit.

You’ll have more information than investors and will be less likely to buy into projects that aren’t telling the truth about their tokenomics.

Conclusion

Traditional crypto fundamental analysis still has its place, but if you want a competitive advantage over other traders, you need to supplement your knowledge with on-chain data.

The on-chain metrics we’ve looked at, such as activity levels, holder distribution, TVL, and smart money activity are all valuable tools for ensuring you’re buying tokens that have potential.