The Challenge of Investing in Crypto
The rapid pace of innovation, constantly shifting narratives, and an ever-increasing amount of data points make selecting the right cryptocurrencies for investment extremely challenging. Most investors are familiar with traditional fundamental and technical analysis methods widely used in traditional markets. While those approaches are valuable, the transparency of blockchains introduces an additional layer of analysis unique to the crypto markets—onchain analysis.
Every transaction and event on a blockchain is recorded. By leveraging onchain data, you gain a deep understanding of exactly what is happening. On-chain analysis enables you to track the activities of token holders, identify the largest holders, understand transactions and movements related to the token, and much more.
In this guide, you’ll learn about key onchain data points to look at when analyzing cryptocurrencies. I’ll also be going through an example to showcase the process in action.
Key Onchain Metrics to Evaluate Cryptocurrencies
Not every data point is valuable for making decisions, and without proper context, it can lead to incorrect inferences. Often, "whale" transactions widely shared and circulated turn out to be merely internal transactions of large exchanges.
To make accurate decisions, investors need to focus on finding out the who and what.
- Who are the top holders
- Who’s buying and selling
- What top holders are doing
- What is Smart Money doing
In order to explain the key metrics in more detail, let’s dive into a workflow using Pendle as an example.
Top Holder Balances and Distribution
Understanding who the top holders of a token are and the concentration of ownership is crucial, especially for tokens with small to medium market capitalizations.
Here are three insights you can get by analyzing the distribution and top holders using PENDLE as an example:
Quality of holders
The quality of token holders often reflects the project's quality. During the crypto winter, valuations of many crypto protocols plummeted. Smart investors used this period to accumulate and take significant positions in protocols they believe in. For instance, examining PENDLE reveals that the Spartan Group and Arthur Hayes are among its top holders, indicating high-quality backing.
Both started accumulating Pendle 2 to 7 months ago, well before its recent run up.
Concentration of ownership
Extreme caution is necessary when ownership is heavily concentrated among a few. Such concentration raises the risk of price manipulation by a single entity. For large whales or funds considering a position, understanding the concentration of ownership can guide position sizing and risk management strategies.
Balance changes
Monitoring top holders' balance changes offers insights into their outlook on the protocol. Setting up Smart Alerts for top holder addresses in PENDLE is an efficient way to track their activity.
However, a decrease in token balance does not always indicate selling. For tokens offering yield farming opportunities, large holders might stake their tokens to earn returns rather than leaving them idle. Therefore, examining the transaction history of an address is essential to understand their actions fully.
In the case of PENDLE, we see that Arthur Hayes added 500K more tokens over the last 30 days while Spartan Group had a slight drop in their holdings. Diving deeper into Spartan Group’s activity, we see that the tokens were sent to Binance.
Who’s buying/selling the token
For traders or investors looking for potential entries or exits in cryptocurrencies of interest, two main approaches are:
- Leveraging technical analysis
- Copying trading strategies of whales/Smart Money
Getting a quick overview of who has bought or sold a token can give you a sense of the general sentiment among key market participants. Observing a large number of Smart Money addresses selling a token after a significant run-up might indicate a good time to lock in profits.
While aggregated overviews provide a high-level understanding of what key wallet addresses are doing, monitoring the live feed of DEX trades offers real-time insight into how key holders are reacting to announcements or market movements.
In the case of Pendle, we’re starting to see sells slightly outpacing buys over the last 7 days as investors lock in profit. Looking at recent DEX trades, we see a large purchase of ~$70K Pendle but Apollo Capital is selling.
What holders are doing with the tokens
Long-term investors often stake their long term holdings to enhance their capital efficiency. A high percentage of a particular token being staked is usually a positive indicator of holders' sentiment towards the protocol's long-term future. Moreover, it reveals which pools holders are staking in, providing insights into the strategies of the most successful investors. For example, a significant majority of Pendle tokens are staked in their vePendle pool.
Smart Money Token Holdings
An increase in Smart Money holdings or in the number of Smart Money holders over time suggests that top investors and traders are optimistic about the project.
Despite a decrease in Smart Money holdings from historical highs, there has been a steady uptick since July 2023. The number of Smart Money addresses holding the token has returned to previous highs. This gradual increase in total holdings and Smart Money addresses over the last 6-7 months clearly signals optimism about Pendle’s future.
Summary of analysis
High-quality holders, who accumulated at lower prices, are still holding and even adding to their balances despite the massive run-up. Many holders are actively staking their tokens in the vePendle pool. There has also been an increase in the number of top market participants gaining exposure to Pendle. However, market conditions change rapidly, underscoring the importance of consistently monitoring and tracking these metrics.
Leverage Onchain Data for Fundamental Analysis
In fundamental analysis, investors analyze 4 main areas:
- Quality of the team
- Reviewing the whitepaper
- Tokenomics
- User activity growth
Onchain data is extremely vital in gaining a clearer understanding of a project’s user activity growth. Metrics such as daily active addresses, number of transactions and total value locked (TVL) are all found onchain.
It’s often worth diving deeper into TVL, to find out who are the top depositors in order to gauge quality. Using Blast’s contract as an example, we see multiple Smart Money addresses within the top depositors. This indicates a level of optimism towards Blast, the Layer-2 project tied to the team behind Blur.
Get Deeper Insight into Any Token
While fundamental and technical analysis remains valuable, on-chain analysis offers a competitive edge by providing insights into large on-chain movements and the activities of other traders, investors, and institutions. This deeper understanding of market dynamics can be crucial.
The analysis and workflow described serve as one approach to utilizing on-chain data for token analysis. As you delve deeper and explore further, you'll develop your own process and identify specific data points to monitor.
Simply head to app.nansen.ai, hit CMD + K and search for any token to start analyzing!
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