introduction
Blockchain technology makes the data on the chain open, transparent and non-tamperable. Through visual and quantitative analysis of these data, various on-chain data indicators are formed. With the development of the blockchain and encryption market, unique on-chain data analysis will surely become a common tool like K-line technology. Understanding the essence behind the data and rationally using and combining indicators can better guide trading decisions.
This series mainly interprets various indicator charts on Glassnode, a professional analysis website on the chain, to help friends understand the essence behind the data, assist in judging big cycles, buy bottoms and tops, and discover trend opportunities. Generally speaking, consensus conclusions drawn from multiple indicators are more convincing. By combining and applying on-chain indicators from different dimensions, the market can be interpreted more comprehensively and more reliable judgments can be made.
Tip: Any indicators and tools need to be treated with caution, and do not blindly rely on indicators to make decisions. Indicators are only auxiliary data and need to be combined with personal research and judgment to truly exert value.
This issue is the first in a series of on-chain data interpretation - BTC basic address data interpretation.
Interpretation of address data
Address data is the basis of on-chain data, clearly recording the distribution of BTC chips and participation in BTC transactions.
Regarding address data, we must first understand the several types of users on the BTC chain at this stage:
Miners: Miners are the most active group of people on the chain. Most transactions are closely related to miners. Miners will regularly collect the BTC earned from mining and transfer it to the exchange to sell to pay for electricity. The periodicity of miners The activity has also caused regular fluctuations in the number of active addresses on the chain.
Large accounts: Since BTC transfers require transaction fees, generally speaking, individuals or institutions that hold a lot of BTC will choose to buy BTC on the exchange and then transfer it to a newly created wallet address for storage. This is because storage security is high and they The transaction frequency is low. Most retail investors will directly choose to hold BTC on the exchange for easy trading at any time.
Gray/black industry users: BTC is the first cryptocurrency and the most decentralized cryptocurrency. Its non-tamperable, transparent and verifiable characteristics attract the gray and black industries that are subject to legal supervision. Although the price is unstable, it cannot be frozen. . Gray and black property transactions are also part of the on-chain activities.
BTC inscription players: The inscription track that emerged just this year has given BTC new composable functions in addition to value storage. Players will use satoshis as carriers to mint tokens and NFTs on the BTC network. This craze has greatly increased the activity on the BTC chain and even caused congestion on the chain. In the future, Inscription players will also become a major player on the chain. composition.
1. Number of active addresses
This metric counts the number of unique addresses in the network that are active as senders or receivers. Only addresses that were active in successful transactions are counted.
The active address volume indicator reflects the total number of addresses participating in transactions on the blockchain network. This indicator can be understood from two dimensions:
Number of participants - An increase in the indicator means an increase in participants and an inflow of funds; reaching a new high in sync with the price means normal, otherwise there are risks or opportunities.
Turnover - higher values mean higher trading activity. Referring to the concept of the stock market, high turnover at a high level indicates a short-term top; low turnover at a low level indicates a bottom.
Historical BTC active address volume:
The overall upward trend of this indicator over more than 10 years shows that the number of addresses participating in transactions is increasing, that is, the number of participants and the amount of funds are increasing. It also witnesses that BTC is being breached from the beginning to the present. It is recognized by more and more funds.
In the figure, we can also see from the two rounds of bulls and bears in 2017 and 2020 that this indicator shows significant cyclicality, with the number of indicators increasing during the up cycle and decreasing during the down cycle.
During the price increase cycle, when the number of active addresses shows a nearly vertical and substantial increase, it indicates that new users and funds are rapidly pouring into the market in the short term, pushing up the price. But this rapid growth usually cannot last for long. When growth begins to slow, it is likely to mark the arrival of a short-term high. At this time, it can be understood that the market turnover rate has surged. A high turnover rate indicates that the distribution of funds has become relatively overcrowded, and it is difficult for new funds to continue to flow in, and prices will face correction pressure.
When judging whether the market is too hot, the growth rate of the number of active addresses is a very important reference indicator. When growth begins to slow down, the market's ability to continue rising should be viewed with caution and risk management should be done. The indicator itself also has limitations and needs to be judged based on other variables. But changes in its growth rate can provide useful trend turning signals.
Number of BTC active addresses from March 2020 to December 2022:
Taking the active address volume in 2020 in the picture above as an example, looking at the two high points in March 2021 and November 2021, the difference between the high point positions is less than 10%, but there is a significant increase in the number of active addresses. The decline shows that there is a large difference in trading activity and participation between the two high points. This shows that the capital activity and participation at the second high point are not as good as the first high point, which sends a risk warning signal, and the subsequent market continues to fall.
This indicator has limited help when the market is declining, but it has more reference significance when the market continues to hit new highs. It mainly issues risk tips from the perspective of a trend, but it cannot find a specific and precise top.
2. Amount of new addresses
This metric counts the number of unique addresses that appear for the first time in a native coin transaction on the network (to filter out duplicate addresses).
This indicator is a simple indicator of the incremental number of people. Whether it is the trend of the indicator, or the usage and analysis methods of the indicator, it has the same effect as the number of active addresses. After all, the increase in the number of active addresses can also reflect the increase in the number of new addresses to a certain extent.
Historical BTC new address volume:
In a healthy rising environment, indicators should rise in tandem with prices and continue to reach new highs;
Every time the indicator shows a rapid rise of almost 90 degrees in the short term, it means the arrival of FOMO sentiment and a staged top;
In the same bull-bear cycle (it is meaningless to compare the highest and lowest points of indicators across cycles, what needs to be compared is the structure of the trend), you should be very vigilant when there is a large deviation between the indicator and price;
The figure below is a derivative chart of the number of new addresses: BTC New Address Momentum Indicator
This metric compares the monthly average of new addresses 🔴 red line to the annual average 🔵 blue line to highlight relative changes in dominant sentiment and help identify when trends in network activity shift.
Healthy network adoption typically manifests as an increase in daily active users, an increase in transaction throughput, and an increase in demand for block space (and vice versa). The number of new addresses on the chain can be an effective tool to measure the scale, trends and momentum of activity across the network.
Monthly 🔴 > Yearly 🔵 represents an expansion of on-chain activity, typically improving network fundamentals and growing network utilization.
Monthly 🔴 < Yearly 🔵 represents a contraction in on-chain activity, typical of deteriorating network fundamentals and declining network utilization.
When the red line crosses the blue line upward, it often indicates that a new trend is forming.
3. Non-zero address amount & address balance greater than 0.01
These two indicators count the number of addresses with currency balances greater than 0 and greater than 0.01. The trends of the two are almost the same, so they are compared together.
The number of addresses with historical BTC balance greater than 0:
These two indicators reflect the increase in investors brought about by Bitcoin’s own development. In the past 10 years or so, these two indicators have shown an overall growth trend and are less affected by the short-term market conditions. Usually only at the top of a bull market do indicators show significant declines.
At present, these two indicators are still growing rapidly. This means that Bitcoin’s user base and transaction volume are continuing to expand and are not yet close to a stable state. When the growth rate begins to slow down significantly in the future, it may indicate that Bitcoin has matured and its market value will gradually stabilize. By then, Bitcoin prices are expected to reach unimaginable heights.
The number of addresses with historical BTC balance greater than 0.01:
4. Balance > 1 address amount - trend reversal indicator
This metric counts the number of unique addresses holding at least 1 token. The relationship between this indicator and price can help us predict trend reversals to a certain extent.
Number of addresses with historical BTC balance greater than 1:
As can be seen from the figure, before 2018, this indicator had a highly consistent trend with the number of non-zero addresses and the number of addresses with balances greater than 0.01. The main reason is that the price of Bitcoin was low in the early days and it was not difficult to hold. Therefore, the indicator growth was mainly driven by the development of Bitcoin itself and was less affected by market fluctuations.
But starting in 2020, as the price of Bitcoin rose sharply, the growth rate of this indicator slowed down significantly. At the current high price, many investors have passively exited, and indicator growth has begun to be more affected by market fluctuations.
It can be said that before 2020, the growth of this indicator was mainly driven by Bitcoin's own development factors; but after 2020, as the price of a single BTC becomes expensive, the rise and fall trend of this indicator is gradually dominated by market fluctuations.
As can be seen from the top, this indicator has shown significant cyclical characteristics since 2020. When the market rises, the indicator rises, indicating more participants and funds. When the market falls, the indicator falls, indicating a decrease in the number of participants and the exit of funds.
Also starting from 2020, this indicator can be used as a trend indicator to guide trading. Taking the above picture as an example, the market trend from October 2020 to early March 2022 is used as a cut and display. Each red box in the figure represents the market trend at a stage, the red arrow represents the market trend, and the green arrow represents the indicator trend.
From May 2020 to May 22, the number of addresses with a BTC balance greater than 1:
When the trend of the market and the indicator are consistent, whether it is rising or falling, it is in a relatively smooth trend stage.
However, when the market trend and the indicator trend are inconsistent, the two deviate, and a warning signal is issued. As can be seen in Part 2 of the figure, the price remains at a high level, but the indicator has dropped rapidly, indicating that the number of people entering the market and funds can no longer keep up with the price increase, so the price fell sharply in May. As can be seen in Part 3 of the figure, when the price continued to fall at the end of the correction, the indicator had already shown an upward trend of 45 degrees, indicating that during the final decline, funds were buying against the trend, and finally reversed the trend. The decline was followed by a four-month upward trend.
Part 4 of the figure is the two tops at the end of October and early November 2021. The second top hit a new high, but the indicators dropped significantly compared with the first top, indicating that the buying funds at this time were no longer able to continue. It also ushered in a substantial correction. Finally, in the fifth part of the picture, in March 2022, the price fluctuated repeatedly and bottomed out at a low level of around 3w3. However, at this time, the indicator had bucked the trend and began to rise, diverging from the price trend. Its trend was basically opposite to the second part of the picture. . Therefore, judging from the indicators, this may be a staged bottom.
Finally, comparing Part 2 and Part 4, we can also see that the high points of the two are similar. The price of the latter is higher, but the indicator of the latter has been significantly lower than the indicator position of the former, forming a long-term divergence. Part 4 is once again verified as a stage top.
This indicator can provide early warning of market reversal through the divergence trend. It is a typical trend type indicator. The disadvantage is that it does not help to judge the time of top and bottom and the precise points.
5. Balance > 100 addresses
This metric counts the number of unique addresses holding at least 100 coins.
Number of addresses with historical BTC balance greater than 100:
Looking at the overall trend of this indicator, no obvious cyclicality is found, and its correlation with the currency price is not strong at present. The main reason is that with the halving of BTC, new BTC is mined slower and slower. Most of the addresses holding more than 100 coins are ancient whales or institutional holdings. They are not sensitive to prices. As the saying goes, the strong will always be strong. , this data is more like illustrating the class monopoly in BTC. As the market structure stabilizes, the wealth of this group of people becomes increasingly difficult to shake.
6. Proportion of holdings for more than one year - bull and bear cycle division indicator
This metric counts the percentage of circulating supply that has not changed in at least one year.
The proportion of historical BTC holdings for more than one year;
This indicator counts the proportion of total BTC held for more than one year. It can be clearly seen from the figure that this indicator has shown strong cyclicality since 2014, and is inversely related to the rise in currency prices, that is: during the price decline, the indicator rises; during the rapid rise in price In the process, the indicator began to decline. Before the main rise of the two bull markets in 2017 and 2020 started, the indicator accounted for more than 60%. Then, after the indicator experienced a short period of sideways trading, the indicator began to decline.
The reason for the above trend of the indicator is that long-term holders always accumulate chips when the price drops and sell chips when the price rises. Before the indicator officially drops significantly, it can be observed that there is a stage where the indicator goes flat, which is a trial period. The flat indicator means that long-term holders began to sell chips, but the chips sold were only equivalent to the amount bought a year ago, and not more.
If the price can show a slight increase during this process, it means that there is an inflow of funds in the market at this time and it can withstand a small amount of selling pressure. As the price continued to rise, long-term holders began to increase their selling efforts, and the indicator began to officially decline.
However, at this time, the money-making effect caused by the price increase will attract more funds to enter the market, which can fully absorb the chips bought by long-term holders during the bear market. Therefore, this stage is characterized by a rapid rise in prices and a significant decline in indicators. It is a process of chip distribution.
This process will continue until new funds are insufficient to absorb the selling pressure, which is manifested as a simultaneous decline in prices and indicators, but this time period will be relatively short, because this situation shows that selling more BTC will only cause the price to rise. The lower it is, a vicious cycle is formed, so some holders with financial strength will stop selling their chips and turn to long-term holdings, and a new cycle will begin.
This is an indicator that is worth thinking about deeply. Through this indicator, the process of bull and bear markets can be clearly defined:
Prices rise, indicators rise: late bear market
The price rises and the indicator goes flat: when the indicator appears at a high level, it is the early stage of a bull market; when the indicator appears at a low level, it is a bear market rebound or test market;
Prices are rising, indicators are falling: the bull market is mainly rising.
Prices fall, indicators rise: late bull market
Prices fall, indicators fall: Early stages of a bear market
The bull-bear division represented by this indicator will generally not change, because the behavioral patterns represented by large funds are difficult to change, so the bull-bear transition cycle led by them is also difficult to change. It may be that when BTC is sufficiently dispersed, it will be possible to change the above-mentioned cycle division model.
As can also be seen from the chart above, the bull-bear cycle has shortened significantly since 2020, and is no longer the past four-year cycle with the halving theme.
7. Panic and Greed Index
Alternative.me’s classic indicators include volatility (25%), market volume (25%), social media (15%), questionnaires (15%), BTC dominance (10%), Google Trends (10%) ) These six sources collect data in order to visualize crypto market sentiment changes. **
This indicator has five ranges, red is extreme panic, orange is panic, yellow is neutral, green is greed, and blue is extreme greed.
This indicator is an early warning indicator. Extreme greed must mean a short-term top, but it may not be a mid-term top; there is no inevitable connection between extreme panic and bottom-buying. The early plunge of Xiong often causes extreme panic, but the bottom-buying will definitely be buried by then.
This indicator is relatively sensitive and has an early warning function, but it cannot accurately help determine the top and bottom. It needs to be used in conjunction with other indicators.
Tip: Any indicators and tools need to be treated with caution, and do not blindly rely on indicators to make decisions. Indicators are only auxiliary data and need to be combined with personal research and judgment to truly exert value.
This issue is the first in a series of on-chain data interpretation - BTC basic address data interpretation. Next, we will also update on-chain high-level data and other indicators. Friends who feel that V Guest’s analysis is helpful to you, please click Like + follow, and everyone is welcome to leave a message in the comment area for discussion.
