Top-5 On-Chain Bitcoin Metrics Every Miner Should Know
From the outside, the crypto industry can seem like something with a lot to do with luck.
After all, how else can people rationalize stories of a 17-year-old millionaire or their friend who bought and kept their crypto stash only for it to appreciate dramatically in a few weeks?
For seasoned crypto miners and traders, the place of analysis and data is unquestionable. Cryptocurrency management is a skill. Like every skill, the more dedication one gives to a craft, the higher one’s chances of attaining consistency.
On-chain Bitcoin metrics are an invaluable aspect of such analysis. They provide insight that miners need to make decisions.
About Bitcoin On-Chain Analysis
The beauty of an asset that relies on a public blockchain is lots of data to use. Investor activity and history are visible for the massive data sets on the public ledger.
Accordingly, miners can use the treasure-trove of immutable data to significant effect. They are vital indicators of community sentiment and behavior. Therefore, analysis of these metrics provides a fundamentals-driven approach rather than relying on hype or speculation. There is a place for quality technical analysis in this industry.
A miner can focus exclusively on one asset. These are usually significant coins like BTC or ETH, or even a hot prospect they firmly believe will explode. Alternatively, one can compare different crypto assets and identify common or isolated trends.
These fundamentals can even justify the current price of a particular asset. If an asset is undervalued, there is a legitimate cause for optimism. However, the reverse situation may mean that it is time to pull the handbrake lever. This article does not provide an exhaustive list, and some of the metrics below may have different names or even divisions in other contexts.
Let’s look at some of these on chain metrics:
- The Number of Active Addresses
This metric is a natural place to start. The theory comes from a basic understanding of the network effect of any service. Accordingly, one can assume that the higher the number of users of a coin, the more its utility for the individual user.
However, the number of active addresses cannot be an absolute determiner of the value of a token.
For prominent cryptocurrencies like Bitcoin, their addresses have a backup. The monthly active addresses have enough of a track record to determine spikes and falls. However, for newer coins, it may not be an absolute determiner.
- The Number of Transactions
After knowing the coin’s user base from the active addresses, transaction volumes can also be valuable for research. On-chain transactions are a matter of public record for Bitcoin transactions. Their transparency is certain because no one can retrospectively alter the transactions.
Therefore, transaction volumes can also provide general indicators as to the usage of the network. Transaction volumes can be a display of healthy trading or frantic activity during either rallies or a market collapse.
The downside to this metric is that certain exchanges have faced accusations of fabricating their volumes using trading bots. There is no cost associated with creating addresses on the network. A single user can send a small balance through hundreds of transactions.
Accordingly, this metric, like the first one, should only provide general indicators of community activity. It was an early indicator, and there have since emerged better indicators of activity.
- Unspent Transaction Outputs (UTXOs)
This metric is a way to track the movement of Bitcoins on the chain. UTXO refers to a transaction output that can be used as input in a new transaction. In essence, it follows where each blockchain transaction starts and finishes.
Each cryptocurrency transaction is made of inputs and outputs. A user takes a UTXO, provides a digital signature to confirm ownership, and results in the output. The UTXOs are then considered “spent,” and the cycle can start again.
This metric tracks when wallets last move coins and how long they hold the coin. The age, size, and number of UTXOs on a particular blockchain are beneficial miner and trader activity indicators. Hodl statistics are valuable in assessing the general sentiment of investors.
Therefore, the nature of UTXO provides more actionable data than the other two. Nick Carter and Antoine Le Calvez are the two people who came to prominence for this metric. They have a mechanism for aggregating UTXOs and provide valuable data for crypto analysts..
- Coin Days Destroyed (CDD)
This metric is quite similar to the UTXO tracking metric. Coin Days Destroyed (CDD) measures economic activity, highlighting the unspent coins for a long time.
For instance, when looking at total transaction volumes, one may not get the complete picture because of rapid, low-volume transactions. Coins in cold storage may also not show up in that metric, giving an incomplete dimension. CDD provides additional data as it gives importance to the time coins stay in storage and highlights changes in long-term holder behavior.
For each day that a coin unit is unspent, it accumulates one “coin day.” The CDD metric continues until the next time the owner spends the coin and resets it to zero. The aggregate number of coin days destroyed gives data as to the lifespan of those coins. Therefore, this metric, along with the UTXO, can reveal fascinating information about miner sentiment and hodler confidence.
- Network Value to Transaction (NVT) ratio
Chris Burniske and Jack Tatar founded the website Coin Metrics to create data and research reports for crypto analysts. They came up with the NVT ratio in 2017 to determine the utility value of a cryptocurrency, specifically how much the market is willing to pay for the transactional utility of the blockchain.
This ratio compares the value of the network and the volume of blockchain transactions. It is a complementary metric to the first two. Accordingly, a miner can use it for a rough assessment of whether a coin has the right value or discrepancies. For instance, high transaction volumes and low network value produce a high ratio, indicating that the coin may be overvalued.
The Big Picture: Use these Metrics to Your Advantage
These metrics provide simple ways to assess long and short term trends in Bitcoin and other cryptocurrencies. One should not imagine that the metrics are cast in stone. If you research enough, you can develop the right combination of metrics to make your assessments.
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