Stacked Insights Newsletter, 11.10.21 Using on-chain analy | Stacked

Stacked Insights Newsletter, 11.10.21

Using on-chain analysis for BTC trading

The BTC blockchain allows anyone to see public stores of organic financial data. That’s an incredibly powerful info source if you know how to use it. Use this quick guide to on-chain analysis to inform your crypto trades + investments using blockchain-based signals.

Tracking token movements
The best place to start with on-chain analysis is this question: are token holders actually holding tokens or are they spending them? To figure that out, you need to track token movements. Tracking tokens is a fundamental part of on-chain analysis. In a nutshell, on-chain analysis seeks to watch Bitcoin wallets for a few things:

Token inflows/outflows to exchange wallets
Whales (high net worth wallets) moving tokens
HODL rates (movements of old tokens)

Watching the amounts of tokens in wallets can help uncover soon-to-happen events like supply shock — a phenomenon that happens when there aren’t enough coins in circulation to cover demand.

For instance, if on-chain analysis reveals more BTC wallets are increasing their holdings and moving to cold storage vs. sending BTC to exchanges, it’s evident the market is in accumulation mode. Accumulation typically precedes a bullish phase — so, if you’re aware of accumulation, it’s simple to position yourself accordingly.

On-chain indicators
There are a few well-tested and trusted indicators used by on-chain analysts for understanding market cycles. One of the most important indicators is called the Puell Multiple (PM).

What the PM effectively measures is how profitable BTC miners are by combining daily BTC emission rate + yearly moving average. When miners are very profitable during market tops (high incentive to sell), the PM tends to peak above a reading of 4, giving you a straightforward way to cycle in and out of the market using real data.

Another simple on-chain indicator is realized market cap. The realized mcap removes all inactive mature coins (i.e., tokens that haven’t from wallets moved in ages) from its purview, then revalues them at current prices when they’re spent.

With realized mcap, you can determine whether the market is in a bull, bear, or accumulation phase based on the interplay between the realized cap and the market cap. Historically, the market cap dipping below the realized cap means a bear market cycle has finally bottomed out.

Next, we’ll share the best resources for getting started doing your own on-chain analysis.