What Is Onchain Analysis, And Why Is It Useful For Crypto Traders? (2024)

ANew Paradigm in Investing

Public blockchains such as Ethereum, Solana, and Bitcoin are transparent digital ledgers, auditable by anyone and everyone. Every transaction and event on these chains is visible and publicly accessible, allowing anyone, anywhere, at any time, to access and analyze it. This transparency ushers in a new paradigm in trading and investing. It enables real-time monitoring of trades and transactions, providing a deep understanding of market activities. Consequently, traders who effectively utilize onchain analytics can make more informed decisions and identify opportunities early.

What is Onchain Analysis?

Onchain analysis, or blockchain analytics, involves examining blockchain data such as transactions, trades, and wallet address holdings to understand the actions of market participants on respective blockchains in real time. For investors or traders, you’re able to get insight into who is holding or trading specific cryptocurrencies, how sophisticated actors are positioning their portfolios, and how token holders are reacting to market events. This unique insight into market movements, absent in traditional finance, offers investors a new way of doing research and due diligence.

Often, raw blockchain data isn't easily accessible to the common person and requires further contextualization and deciphering for it to be useful. Onchain analytics platforms such as Nansen, do all the heavy lifting for you and turn raw data into actionable insights.

For those seeking a more comprehensive understanding how blockchain analytics works and its utility as a trader, two additional guides are available: 'Blockchain Analytics: The Ultimate Tool for Understanding Crypto' & 'What are the top crypto whales buying? How to track and find them'

Key Insights Traders Can Get From Onchain Analysis

Now that you have a foundational understanding of onchain analysis, it's crucial to pinpoint key data points for consideration. Although blockchains document every transaction and event, not all this data is useful for traders. The ability to concentrate on vital information and disregard the rest is what sets elite traders apart. Let’s delve into the most significant onchain data points to guide you in your journey

Holdings and Activity of Whales and Institutions

In traditional markets, traders often wish they could understand the moves of institutions or top traders. In the crypto world, with the right tools, this becomes possible. Although crypto transactions are pseudonymous, platforms like Nansen label wallet addresses of key entities, funds, and influential individuals, illuminating their activities.

Visit Nansen and use CMD + K to search for any entity, ENS, or wallet address for analysis. You can switch between individual chains or opt for a multi-chain view using the toggle in the top right corner.

Monitoring the holdings and transaction patterns of significant players, such as whales and institutions, enables traders to align their strategies and anticipate market shifts. However, these large entities might not always yield the highest returns or be the first to new opportunities due to their scale and strategy. Nansen enhances this by labeling wallets with behaviors, particularly Smart Money labels.

Tracking Smart Money Activity

Smart Money wallets are those that demonstrate the highest returns in specific on-chain activities. The top performers in each activity are awarded a Smart Money label relevant to that activity, which includes liquidity provision, DEX trading, NFT trading, airdrop farming, and more.

Nansen offers aggregated overviews of the entire Smart Money segment, highlighting key movements and activities. This feature reveals the cryptocurrencies top players are holding, accumulating, or selling, and also identifies wallets with the highest returns over various time periods.

For more details on tracking whales and Smart Money addresses, check out our latest guide on the topic.

Who’s Buying, Selling or Holding Your Tokens

Another approach to onchain analysis is to focus on the movement and holders of specific tokens, rather than individual wallet addresses. Monitoring the shifts in holdings and transactions of top holders can provide insights into their sentiment and outlook on a particular token. Tracking the buyers and sellers of a token can serve as valuable indicators for your trading decisions.

On Nansen, you can access an in-depth view of all onchain movements of any token across supported chains. This includes details about the holders, who bought and sold the token, flows into exchanges, and Smart Money activity.

For example, examining BEAM through Nansen's Token God Mode, we notice that several Smart Money addresses, including CitizenX and DCG, have transferred tokens to Binance and MEXC following a price increase from $0.018 to $0.023. These transfers suggest that these entities might be taking profits on their BEAM holdings. Generally, deposits to centralized exchanges signal potential selling, while withdrawals often indicate buying.

To stay on top of key onchain movements, you can set up Smart Alerts for the largest holders of your chosen token or for large transfers of the token itself. These alerts are delivered in real-time to your Telegram or Discord, keeping you informed and allowing you to be early to potential trading opportunities.

Examples of transactions to monitor:

• Large transfers to/from centralized exchanges by relevant entities/addresses
• Holders increasing/reducing their holdings
• Who’s buying/selling on DEXs

Monitoring Onchain Capital Flows

Tracking onchain capital flows is perhaps the most versatile starting point. Without needing a have specific tokens or addresses in mind, you’re able to find alpha just by analyzing onchain flows and following the money. While it’s difficult to do it on your own, it only takes seconds using Nansen.

Abnormal spikes in onchain activity

Leveraging it’s database of labels and onchain data coverage, Nansen utilizes machine learning models to analyze transactions on the chain to surface spikes in activity across tokens and NFTs via Signal cards. These cards are displayed on your home page or can be viewed in the dedicated Signals feed. You’re also able to filter for specific categories of Signals to further hone in on onchain movement that you care about.

There are currently 9 categories of Signals:

• CEX Token Flow
• Smart Money Token Flow
• Smart Money NFT Mint Presence
• Smart Money NFT Mint
• NFT Volume
• NFT Mint Volume
• DEX Token Flow
• Fresh Wallets Flow
• Top Balances Change

Onchain flows across tokens

Another key feature when monitoring onchain flows is Token Paradise. Token Paradise provides an aggregated view of the performance of tokens across multiple categories such as price action, onchain flows and key onchain metrics.

Looking at the Token Flow tab of Token Screener, you’re able to get quick overviews of onchain flows across fresh wallets, Smart Money and exchanges across various timeframes. Switching to the Onchain Metrics tab gives you an overview of key onchain metrics such as number of holders and Smart Money ownership.

Curating your own alpha list of wallet addresses

Oftentimes, you have a unique set of cryptocurrencies that you’re looking into and are interested in analzying traders of a similar profile. Most of the methods described above are token specific and doesn’t account for multiple tokens at once. on Nansen identifies wallets holding tokens and NFTs that matter to you within seconds.

Often, you may have a unique set of cryptocurrencies that you are interested in analyzing, focusing on traders with a similar profile. Most of the methods previously described are token-specific and do not accommodate multiple tokens simultaneously. Nansen's Smart Segments quickly identifies wallets holding tokens and NFTs relevant to your interests.

Simply input the conditions you're looking for, and Smart Segments will identify Ethereum addresses that meet these criteria, labeling them accordingly. The list created is dynamic, continuously updating to ensure it remains current. To actively monitor these addresses, you can either view their activity in aggregate or analyze individual wallets on Nansen for more detailed insights

Useful Tools for Onchain Analysis?

‍The tools employed by investors depend on the types of onchain activity that interests them. Each tool has their own unique set of features and focus. Here’s a list of 3 tools that you can try out:

Nansen: Nansen offers deep insight into a wide range of onchain activity across all categories. You’re able to analyze wallet addresses, NFTs, tokens, liquidity pools, across a multitude of chains all on a single platform. With over 300 million wallets labelled, getting a clear picture of what’s really happening onchain is seamless.

Glassnode: While Nansen shines in it’s coverage of Ethereum and numerous other Layer-1s and Layer-2s, it doesn’t offer coverage of the Bitcoin network. This is where a platform like Glassnode shines. Glassnode has numerous onchain indicators that offer investors insight on the Bitcoin network.

Dune: For users looking for high level overviews of the performance of individual protocols, Dune is the place to go. By understanding the activity and growth of various protocols (DEXs, liquid staking, etc), you’re able to gauge the fundamental value of them, akin to analyzing a company in the equity market.

Limitations of Onchain Analysis?

Not every action in the crypto world occurs onchain. Activities within centralized entities, such as trading on Centralized Exchanges (CEXs), happen offchain. While it's possible to track the movement of tokens between CEX wallets and transfers to and from these wallets, the rest remains opaque.

Although blockchains are transparent, they offer degrees of anonymity. Identifying the real identities behind wallet addresses is challenging, which complicates understanding the full context of transactions. Assigning wallet addresses to specific entities or individuals comes with a margin of error. Unless addresses are publicly disclosed, the accuracy of labeling relies on the ability to spot patterns and analyze wallet activities effectively.

Furthermore, accurate analysis depends on the platform's capability to interpret raw blockchain data correctly. As the variety of onchain activities expands, the complexity of accurately decoding this data also increases. Analysis based on poor-quality data can lead to incorrect conclusions and misguided decisions.

Future of Onchain Analysis?

Onchain analysis grows more dependable as the data set grows, and in Nansen’s case, the more accurately labeled wallets. In short, the more data available, the more reliable onchain analysis will become. Due to its reliance on data sets, it represents a natural application for machine learning. Heading into the future, as increasingly large data sets become accessible, the proficiency of onchain analysis will grow in tandem.‍

The combination of AI and machine learning with blockchain data will likely unlock new possibilities. Nansen has leveraged machine learning to help spot anomalies in onchain activity and come up with NFT price estimates.

Conclusion

Onchain data remains an incredible tool for investors and one that is unique to blockchain and crypto assets. Thanks to the distributed ledger technology these systems are built upon, investors receive a bird’s eye view of how liquidity moves. This new age of transparency marks a distinct departure from traditional finance, and Nansen provides the toolkit to fully leverage this unprecedented data landscape.