This article is a collaboration by Glassnode and Bitcoin Magazine to introduce Bitcoiners to the world of on-chain analysis. Our aim is to simplify, demystify and improve access to on-chain data, helping you take the first steps into using these powerful new tools.
The Bitcoin blockchain is one of the most organic sources of data into human behavior in a free market that the world has ever seen. From its cypherpunk roots without price, to today’s corporate adoption with eyes on #LazerRaysTo100K, human demand for ultimate scarcity has attracted buyers and sellers from all walks of life.
Financial markets at their core are a balance of supply and demand which ultimately plot human psychology and perception of value against time. Market analysts have developed and deployed many tools to evaluate present and future valuations. Their goal is to find market inefficiencies, edge and financial advantage over their competitors.
Broadly speaking, there are three primary fields of market analysis and approaches that are utilized within the traditional finance world:
- Macroeconomic (Macro): Analysis of the big picture interrelation of asset classes, geopolitics and central bank policies over very long time scales. The aim is to identify large scale macro trends and opportunities with focus on baskets, indices and asset classes rather than individual “stock picks.”
- Fundamental Analysis/Value Investing (FA): Analysis of the intrinsic and structural advantages and weaknesses of a particular asset or asset class against the total addressable market and competitors. The aim is seeking to capitalize on under/overvaluation and market inefficiencies and identifying prices of maximum relative value.
- Technical Analysis (TA): Analysis of price signals, charts and indicators to extract information, patterns and probabilities with respect to the supply and demand balance over time. TA often places less relative emphasis on asset fundamentals, and instead focuses on the distillation of all known information into one metric: price.
Analysts and traders can opt to deploy any combination of skills and techniques from all fields, while others may specialize in just one. In all cases however, there is a critical input:
Accurate, high quality, timely and preferably asymmetric data.
Data availability is also subject to varying timescales; Technical analysts can observe price data to the second, fundamental analysts may watch quarterly reporting seasons, and macro investors pay attention to monthly central bank meetings and year-over-year changes.
Along comes Bitcoin.
A sound, digital monetary asset that continues to take ground in the minds of investors and analysts around the world. Over the past 12 years, a plethora of strategies and models have been developed in an attempt to model and project the adoption curve, performance and price of bitcoin. Analysts have used everything from transaction volumes to estimates of stored value and even rainbows, with no end in sight for the innovation and creativity.
Going back as far as 2011 Bitcointalk forums, we see the first discussion of the “bitcoin days destroyed” concept (now “coin days destroyed (CDD)”). These early ideas gave rise to open-source iteration and deeper study of the information contained within the Bitcoin ledger. This has now introduced a brand-new concept and field of analysis to financial markets:
By taking the radically-transparent and openly-public information that Bitcoin provides, anyone can now assess the true movement of coins, miner activity and the volume and age of wallet holdings. Bitcoin acts as an immutable record of human behavior, psychology and decision making within a free market for perfect scarcity.
While Bitcoin itself does not know the price or the trades that happen, it does have a perfect memory of every UTXO, every difficulty adjustment and every timestamp for when events happened on chain. Despite this information being public record, very few know how to study it properly to establish a macro view of the bitcoin market.
Glassnode’s objective is to solve that problem.
Principles Of On-chain Analysis
It is true that many of the original ideas and concepts needed to construct on-chain…