On-chain analysis

If you are starting to invest in the crypto market, then you can benefit very much from on-chain analysis. What exactly is on-chain analysis and how exactly do you make use of this?

What is on-chain analysis?

On-chain analysis specifically focuses on analyzing the data on the blockchain, so that you as users can gain more insight into the elements that can affect the price of a crypto. With this data, users can better assess what the price of a crypto is going to do approximately. This allows you to better anticipate on the market. This is also called determining market sentiment.

As a user you will never know 100% what the price of a crypto will do. No one can give that certainty. If someone can, then caution is advised. Also, trading crypto is always risky, just like trading stocks. You can lose your stake. By conducting an analysis you would have a better idea of the economic expectation and the value of the  specific crypto.

On-chain indicators

Now that we know what on-chain analysis is, we're going to take a deeper dive into it. There are several indicators, but bottom line we end up with the following indicators: 

There are three popular indicators:

CDD - Coin Days Destroyed
SOPR - Spent Output Profit Ratio
SOAB - Spent Output Age Bands

Besides these three on-chain indicators, you have many others, such as realized profit/loss, unrealized profit/loss, stablecoin, liveliness, ASOL, NVT, etc.

Coin Days Destroyed
With this indicator you calculate when the last transaction of a particular crypto took place. The longer a crypto has been inactive, the more heavily this factor will be considered. So each day that a crypto is not deployed or used / traded on the crypto market, counts for one coin day.

What exactly is the importance of this for your analysis? This is because a lot of crypto are traded and made. Finally, anyone can create their own crypto. In addition, if there is a lot of crypto being traded, then there is something going on in the market. This can be a positive or negative development. If there is a rising price of a crypto, then the CDD is rising, and then you can wait for people who HODLén to want to take their profits and thus do want to surrender their coins.

If the market is rising, but nothing else changes with the CDD, this can be a signal for a bullish market. This means that investors choose to hold on to their crypto.

Finally, you also have a market that moves sideways. This is when there are no price fluctuations and the market is stable. When investors start trading the coins - so the CDD rises - they have lost their enthusiasm and start looking for a more attractive investment.

Calculation of the CDD indicator
The CDD indicator value is calculated as follows: the number of coins issued x the lifetime of these coins. An example: 3 ETH that have been on inactive for 100 days have collectively accumulated 300 coin days.

Spent Output Profit Ratio
This indicator shows all the profits and losses of coins placed on the on-chain. It is tied to the macro market segment, thanks to its representation of profitability and losses incurred, within a certain period of time.

You measure this indicator by measuring the coins moved in a certain time period. This can be an hour, day or week. You look specifically at the fiat value at the time of UTXO creation as well as the value of the UTXO when it is issued. The UTXO is the unspent transaction output.

Calculation of the SOPR indicator
The SOPR indicator is calculated as follows: divide the realized value of output in USD by the value at creation of the original UTXO in USD. Several outcomes are possible:

• SOPR > 1 - the selling price is higher than the purchase price;
• SOPR < 1 - the selling price is lower than the purchase price;
• SOPR = 1 - the coins are sold at break even;
• SORP higher trend represents gains and the return of illiquid coins to circulation;
• SORP lower trend represents losses and/or that profitable coins are not issued.

Spent Output Age Bands
This indicator is a metric that classifies already issued crypto into different categories. This is done based on age and as a percentage of the total number of coins moved.

By keeping an eye on the SOAB, you can assess whether there are periods when transactions are dominated by younger or older crypto. That is, you have a simple way of understanding whether the market movements are influenced by HODLérs or by the newer participants in the crypto market.

Cooler colors prevail, when most of the trading involves old coins. If younger coins in particular are active, then you get a warmer picture. You can specify the analysis by turning legend items on or off in Glassnode.

Calculation SOAB
The SOAB is calculated as follows: first, you calculate the age of coins issued within a certain time period, such as an hour. Then you're going to see how this number compares to the total number of coins spent, so you have a percentage at hand. You can select a whole slew of time periods, including: <1 hour, 1-24 hours, weeks, months, quarters, years up to and including >10 years.

Glassnode

Glassnode is an on-chain data and intelligence platform. Glassnode gives every user access to all on-chain data, as you can access the numbers from all kinds of different blockchains.

Glassnode's newsletter is completely free, keeping you up to date with the state of the crypto market on a weekly basis with useful figures and cool videos. If you really want to make something of your trading on the blockchain, a paid subscription is a good idea.