On the blockchain, records of when, how much, and where coins have been moved are called transactions. The data about these records is referred to as on-chain data. In other words, on-chain data refers to the records of transactions occurring on the blockchain.
Information such as the quantity and value (price) of a specific coin traded so far, the quantity stored in wallets, and fees can be accessed. Based on this, you can also infer the value and behavior of market participants. Particularly, the ability to view on-chain data "transparently and in real-time" makes it a crucial aspect of cryptocurrency investment.
The utilization of on-chain data can be broadly divided into 1) unprocessed on-chain data and labeling, and 2) on-chain indicators processed from on-chain data.
Unprocessed On-chain Data and Labeling
The first approach involves using raw data in its unprocessed state. Transactions may seem to have little significance, appearing similar to bank transfer records. However, it is important to know the 'sender', the 'type of currency (coin) transferred', and the 'transfer amount' accurately.
For example, let's assume that there is a wallet B that holds the most of coin A. One day, wallet B starts transferring a large amount of coin A to an exchange, and we can observe this transfer process in real-time.
Of course, we cannot know if the deposited A coins will be sold or simply stored in the exchange. However, if it's a large amount, we can be cautious about the possibility of significant volatility in the coin. If it turns out that wallet B belongs to the foundation or a VC of coin A, we might infer that something unusual happened with the project. Labeling refers to identifying and naming the owner of wallet B (foundation, VC, exchange, or individual).
An example of labeling is the wallet '0xdfd5293d8e347dfe59e90efd55b2956a1343963d'. This wallet is one of the wallets owned by the Binance exchange, and since it is labeled as 'Binance', you can check the exchange's asset holdings, deposit and withdrawal records, etc.
This method involves checking who has held which assets, when, where, and how much they moved, and utilizing this information. However, there are limitations because the analysis must be done in an unprocessed state, requiring direct examination of transactions and wallets and tracking the flow. Moreover, the difficulty of analysis is high.
On-chain Indicators Derived from Processed On-chain Data
The second approach involves using on-chain indicators derived from processed on-chain data. On-chain indicators were created to make it more intuitive to use unprocessed on-chain data. They generate indicators by calculating specific values using overall transaction data or classifying them by average values.
Let's look at an example. The price of Bitcoin we can see in the market is the 'last traded price.' Therefore, the market capitalization of Bitcoin is 'last traded price x circulation.' However, the actual value may differ. Some people may have bought at a lower price than the last traded price, while others may have bought at a higher price.
It is almost impossible to calculate such cases in general. However, on-chain data has records of all transactions (even the price of Bitcoin at the time it was moved), and this data can be used to represent a single indicator.
Suppose wallet A has 1 BTC at $1,000 and wallet B has 3 BTC at $2,000. What if we calculate the price and quantity of Bitcoin moved for each wallet and divide it by the circulation? Then, we can know the average actual price, not just the price determined by the last trade. In addition, more indicators can be obtained by calculating the profit and loss status, holdings, and holding period of all transactions.
Using such indicators helps determine whether the current market value (price) is reasonable overall, what behavior market participants are showing, and how the situation compares to the past. This is an example of utilizing on-chain indicators derived from processed on-chain data.
However, it can be difficult to immediately verify how much has moved from a particular wallet, so it is more useful for checking overall trends rather than short-term movements. Also, errors may occur depending on the specified range and time.
On-chain data is incredibly appealing because anyone can view transaction data in real-time. In the world of cryptocurrencies, digital assets, and blockchain, on-chain data is an inseparable element. Of course, on-chain data is not a panacea. However, on-chain data can be utilized in various ways depending on the direction and approach of the investment. Therefore, it is crucial to find the most suitable way to use on-chain data that aligns with your investment strategy.