Introduction
The cryptocurrency market can seem like a scary place for newly initiated investors. There are so many graphs and metrics that a beginner can’t understand where they should start their work. However, with a little practice and learning, every cryptocurrency trader can comprehend the dynamics of the market and make sense of the mountains of data available at their disposal. This article allows cryptocurrency traders to understand the two fundamental cryptocurrency market metrics, namely on-chain volume, and trading volume.
What is On-chain Volume?
Anyone who has an interest in learning about cryptocurrencies knows that cryptocurrencies are a by-product of blockchain technology. Blockchain is a portmanteau of two words block and chain. Blocks are the digital ledgers that store all the information about every transaction on the network. On the other hand, a chain is a word that is used for defining the property of the interconnected web of blocks that work like a detailed history of all the financial transactions.
It is worth noting that on-chain is the type of activity that occurs on the blockchain. It means that all the cryptocurrency transactions that are performed directly on the blockchain are classified as on-chain activity or volume. The on-chain volume also accounts for all the digital currency transfers that occur to an exchange platform from any other external source. The information about these transactions is stored on the blockchain and makes it impossible for any external source to edit or manipulate these details.
How does On-chain Volume Work?
Every on-chain transaction or activity is only added to the main blockchain when the transaction under question is verified. In the case of PoW cryptocurrencies, miners have the task of decrypting every block on a network such as Bitcoin and verify it so that it can be added to the main blockchain as a record of all the transactions. Every Bitcoin block or transaction is only approved when all the miners reach a consensus regarding its authenticity.
What is Trading Volume?
Trading Volume is the type of cryptocurrency activity that happens in the form of transfer from one exchange platform to another. The details and records of these transactions are not stored on the main blockchain but saved on the digital ledgers maintained by the relevant exchange platforms. A considerable number of cryptocurrency tracking services and exchange platforms use APIs or application programming interfaces to keep the records of the digital currency transactions that are used for performing a detailed and technical analysis of the cryptocurrency performance and projections.
How does Trading Volume Work?
It should be clear that the data regarding all the cryptocurrency transactions are not always placed on the main blockchain. When the cryptocurrency moves between two platforms that are not connected to its main blockchain, the data is noticed and recorded by APIs or cryptocurrency data aggregators. Trading volume is also called off-chain volume, and it has several methods of moving digital currencies from point A to point B.
In some cases, off-chain transfers happen with the use of P2P or peer-to-peer agreements. In other cases, investors can use third-party guarantors such as digital wallet services providers to send cryptocurrencies from one digital address to another based on a trade agreement or to make payments to an online merchant. Off-chain transactions do not make any change on the main blockchain.
What is Fundamental and Technical Market Analysis?
When learning about the basics of cryptocurrency market analysis, the investors need to learn about the differences between fundamental and technical market analysis and what they entail. Fundamental analysis is a set of internal and external reasons that influence the underlying value of an asset, such as cryptocurrencies. Fundamental analytics are used to determine whether a given cryptocurrency is currently undervalued or overvalued.
On the other hand, technical analysis entails drawing the data from the past performance of a cryptocurrency and using it to conduct a comparative analysis of the market. The main use case of technical analytics is to help cryptocurrency investors to predict the price projections for a given cryptocurrency. Technical analysis can include candlestick patterns study, earnings-per-share, price-to-book ratio, and other indexes to understand the relevance of a given metric.
How to Perform Cryptocurrency Market Analysis?
When it comes to cryptocurrencies, the core step in performing the market analysis is to collect the relevant data from a blockchain. Without the presence of authentic data at one’s disposal, it is impossible to perform any cryptocurrency market analysis. For extracting the data from a blockchain, anyone with enough storage and a steady internet connection can run nodes and get the required data from a downloaded blockchain. However, this method is considered expensive and time-consuming.
Another alternative for data extraction is to use APIs that are designed to perform the same function. These APIs are easy to use, and they are much cheaper and faster in comparison to the node running. The users can benefit from some popular APIs such as CoinMarketCap on-chain analysis for Bitcoin or use Coinmetric Data Charts. The users can also perform a comparative analysis between on-chain volume and trading volume using these APIs.
Important Comparative Metrics for On-chain Volume and Trading Volume
Before jumping into learning about the differences, the readers need to understand some of the most important comparative analyses performed using on-chain volume and trading volume data. Here are some of the most important points that the reader should learn:
Transaction Count
Transaction count is a metric that informs the analysts about the total number of transactions happening or happening in a given period. However, the seasoned professionals also take into account the funds that are still in the process of being transferred to learn about the truth of the transaction count.
Active Addresses
The number of active addresses is a metric that guides the analysts about the total number of blockchain addresses that are sending or receiving cryptocurrencies for a given time duration. It is useful data that allow the technical analysts to reconcile the actual number of transaction count.
Transaction Value
Transaction value stands for the total amount of value that has been transferred using a particular cryptocurrency or exchange platform for a set period.
Liquidity
Liquidity is not a direct function of the on-chain or trading volume. However, it is an important factor that plays an important role in the cryptocurrency market analysis. Liquidity refers to the ability of a cryptocurrency to be exchanged into another form of cryptocurrency or cash.
When the demand for a cryptocurrency is high in the market, the traders can easily exchange their tokens or coins for another asset. However, when the demand is low or the supply is limited, liquidity drops, and investors will find it difficult to exchange their cryptocurrency reserves and maintain their profit.
What are the Differences Between On-chain Volume and Trading Volume?
When it comes to On-chain and off-chain or trading volume, there are several fundamental differences. The readers should consider learning about these points of distinction in terms of a varied set of factors. Some of the most important differences between the two are given as under:
Exchange Platforms
Cryptocurrency exchanges are the platforms where investors can create an account and sell or purchase different types of cryptocurrencies that are listed on the platform. There are two basic types of cryptocurrency exchanges CEX, which is centralized and regulated, and DEX, which is decentralized and unregulated. DEXs are sometimes also called swaps.
On-Chain volume entails all the transactions that are performed from any external source to exchange, while Trading volume accounts for all the transactions that occur between two cryptocurrency exchange platforms. A cryptocurrency analyst should take reference from both on-chain and Trading volume and use it to compare and filter crucial and useful insights regarding the market performance and behavior.
Metric Relevance
A cryptocurrency trader who has access to both on-chain and trading volume data can use this information to implement relevant metrics to find out useful insights and projections from the market. These metrics can allow digital currency investors how to correctly predict measures like support and resistance levels. A support level is a price point that indicates the stability of a token or coin during a decline.
On the other hand, a resistance level is a price point that shows the point of stoppage for a cryptocurrency during an incline. The price of a cryptocurrency falls further when the support level slips on account of low volume. On the other hand, when the price increases when the volume is low during resistance, and on occasions, price and volume graphs can overlap when consolidation occurs.
Graph Comparison
Cryptocurrency analysts should refrain from using the data that is provided free of cost or ready-made by media outlets and financial organizations. The cryptocurrency market suffers from a massive amount of data unreliability issues.
Serious digital currency investors who want to make sure that their portfolio does not suffer from losses should work using the data from on-chain volume and trading volume to prepare a reliable graph using tools that are available online. In many cases, on-chain volume is confused and presented the same as the trading volume data, which results in creating unreliable and deceptive cryptocurrency market projections.
It is important to understand that the most readily available cryptocurrency market analytics are biased and unreliable. The websites that are posting these data are not accountable for misguiding their consumers as they claim that they are not providing paid trading services or guidance for their readers.
As per a market survey conducted by CoinMarketCap, only 5% of the data provided by media or cryptocurrency aggregators is reliable and trustworthy. A whopping 95% of all the cryptocurrency trading data and metrics are manipulated and based on falsified data projections.
Therefore, all cryptocurrency traders need to learn in detail about the fundamentals of on-chain volume and trading volume to help them work out reliable data and use it to make sensible trading decisions. It can seem an easy option to depend on the advice of the cryptocurrency traders that are hosting a TV show or that are giving hints using their Twitter accounts.
However, all these factoids are biased and tailored to turn the market dynamics to favor the trading interests of one party. Rather than using readymade data, it is ideal for cryptocurrency traders to use the data analytics tool provided by these exchange platforms.
What are the Advantages of On-Chain Volume?
On-chain Volume has evolved from a long history of transaction quantity metrics starting from CDD (Coin Days Destroyed), NVT ratio (Network Value to Transaction), Price Earnings Ratio, NVTS ratio (Network Value to Transaction ratio Signal), and Free Float Supply. However, the earlier forms of investment metrics were directed at securities performance. But the, cryptocurrencies behave like commodities rather than securities. Here are some of the most important metrics that depend on On-Chain volume:
Active Addresses
The first and most important benefit of the on-chain metric is the calculation of the total number of active addresses on the blockchain for a set period. When the on-chain volume is increasing, the chances of active addresses also increasing are higher. Many platforms use the market capitalization of a given cryptocurrency as an indicator of its positive or negative performance, but given the intrinsic investment nature of the cryptocurrencies, it is understandable that the Active Addresses data is a more reliable indicator of the performance.
Total Transactions
The total transaction is the count of the aggregate number of exchanges that took place on the blockchain platform within a specified time. It is worth noting that trading volume accounts for the number of transactions between different exchange platforms. It means that the users will have to filter that data on account of several external factors. However, with the on-chain volume data for total transactions, there is no need to apply any additional metrics to understand the basics of cryptocurrency demand in the market.
Technical Metrics
The advanced data analysts can also use on-chain data volume to find out the metrics, such as the UTXO (Unspent Transaction Outputs) model used for calculating the comprehensive sum of a coin transfer based on its final destination. This metric is useful for Ethereum, which hosts a considerable number of tokens and platforms.
Another important technical metric for on-chain volume is Realised Capitalization, which is used for calculating the market capital based on blockchain activity alone. Additionally, metrics like HODL waves allow the investors to calculate the long-term positions on a blockchain.
Top On-chain Volume and Trading Volume Data Services Providers in 2022
The ideal approach for conducting a reliable cryptocurrency analysis is to run a node or use APIs. However, cryptocurrency investors who find it expensive and difficult to download and run an entire blockchain personally can take help from the automated API service providers. Here is a list of the top 5 cryptocurrency analytics and tools providers in 2022:
Glassnode
Glassnode offers basic data related to on-chain analysis in addition to some analytical tools. The platform is also great for trade volume collection and contains APIs that can help the investors to process both streams of data using professional data analysis tools. Paid account holders can also use high-frequency time series data and advanced access indicators.
CoinMarketCap
CoinMarketCap is the most popular and most cited cryptocurrency data aggregator. The platform offers both free and premium data analytics services for its users. The users can take advantage of the user accounts that are available for comparative analysis and also reconcile their findings with others.
Santiment
Santiment or Sanbase is a platform that is focused on measuring market behavior. However, it also heavily depends on the on-chain data metrics and off-chain data projections. The platform provides readily available data metrics, and there is also a lot of work into discovering new metrics using off-chain and on-chain volume data at its core.
IntoTheBlock
In addition to on-chain and trading volume data, IntoTheBlock also allows users to access a huge library of data analytics tools. The users can use the same platform for performing different analysis services for asset classes such as cryptocurrencies, tokens, stablecoins, securities, and others.
CoinMetrics
CoinMetrics is a very reliable cryptocurrency data aggregator as it is a dedicated service for the analysis of 37 top digital currencies. In addition to the basic on-chain and off-chain volume analysis, the users can also access advanced tools that are reserved for measuring important correlations. The platform also manages a blog that allows consumers to learn and read about important developments concerning the cryptocurrency market.
Conclusion
On-chain and trading volume is one of the building blocks of cryptocurrency analysis. It is worth noting that on-chain volume does not account for second-layer transactions, and it is not very useful for making short-term projections. However, there is the trading volume that allows the investors to fill the gaps and conduct reliable and authentic cryptocurrency analysis by reconciliation and comparative analysis.
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