Stacked Insights Newsletter, 11.09.21 Intro to on-chain an | Stacked
Stacked Insights Newsletter, 11.09.21
Intro to on-chain analysis
Blockchains are massive public data sets tracking token movements. They allow us to view incredible amounts of financial data, including:
Real-time token movements (to/from exchanges)
New wallet creation (to gauge adoption)
Active addresses + tx count (to gauge demand)
Nothing even remotely close to on-chain metrics exists outside of crypto. But that’s a feature, not a bug — cryptocurrencies like Bitcoin are designed to be fully transparent. What on-chain analysis does is utilize that transparency to inform your trading + investment decisions.
How to use on-chain analysis, pt. 1
Blockchain networks count utility as a fundamental feature. Determining just how much use a network is seeing relative to its market cap/token price is a quick yet insightful way to judge how undervalued or overvalued that network + token is.
An early yet timeless way to position how a given blockchain network + token is valued is the Network Value to Transactions (NVT) ratio. The NVT ratio is a basic formula that divides the network’s market cap by its transaction volume within a set timeframe.
Taking Ethereum for example, let’s imagine high token prices at ~$4.5K ETH yet network transaction volume during that same quarter is at a yearly low. The low volume reflects low demand for Ethereum, a network based on utility, insinuating that at $4.5K ETH, the network is overvalued.
You can also use on-chain metrics like NVT to contextualize other fundamental factors. Perhaps competing L1 blockchains like Solana, Polkadot, and Avalanche are gaining impressive traction during the same quarter Ethereum’s transaction volume is declining. Now, you have a more complete picture for creating an investment thesis or trading based on hard data.
Similarly, if Ethereum is seeing record breaking transaction volume (usually reflected by high gas prices) at the same time ETH price is stagnating, the NVT ratio might indicate ETH is undervalued.
In part 2, we’ll explore how to zero in on effective trading strategies using other on-chain metrics like new wallet creation and tracking token movements between relevant wallets.
