On-chain analysis can be overwhelming at first. In this mini-series, I will try to break down the basics into simple concepts.
What is the power of on-chain analysis, and what is not
On-chain analysis is a powerful tool to study the underlying market trends. The methods are unique to blockchain, and the insight is simply not achievable in other markets.
On-chain analysis is also an excellent tool to understand what happened - after it has happened. Serious student of markets will recognize how important this feature is.
On-chain analysis may not be very effective at predicting where the market will go in the shorter term. I find on-chain analysis by no means useless for shorter term predictions, but am humbly admitting that this is not my field of specialization.
On-chain analysis is an evolving field of science. My view is very much colored my occupation as a scientist. I find simplicity very important. In fact, the use of complex metrics requires a strong justification as they are more prone to errors, biases and assumptions.
The simplest explanation is often the most accurate one. and more likely to be true than complicated metrics with advanced formulas.
Equally important, I seek metrics that are truly independent.
Metrics showing co-variance, merely because they are intrinsically connected, do NOT provide additional support to their argument.
As such, I find the pillars of onchain analysis that matters most are:
- Network health
- Network usage
- Hodler Cohorts (Stakeholder conviction)
- Available supply dynamics
- Forensically tracking the money flow (e.g. in and out of exchanges)
By analyzing these key factors, we can gain a deeper insights into the underlying investor dynamics that drive asset prices and shape investor behavior. I will cover these aspects in this mini-series - Stay tuned!
While there is much more nuance to on-chain analysis beyond this, I strongly believe mastering these fundamentals will get you 90% of the way. Don't worry, the remaining 10% is not rocket science either.