Hey Banter Fam!
I wanted to share with you something I put on Twitter that may help to understand and interpret on-chain data for yourself.
There are a tonne of great OC analysts out there on Twitter like @woonomic, @TXMCtrades, @WClementeIII, @_Checkmatey_, @CryptoVizArt amongst many others. They all put out amazing analysis, but their comments sections are inevitably filled with "What does this mean?" or "So wen moon ser?"
I'm now a full-time crypto guy, but in a past life I made my living making super nerdy data relatable to people who weren't interested in getting in the weeds of data analysis to fully understand it all.
Even with a background in analytics, my head sometimes swims trying to get to the bottom of what some of this on-chain stuff truly means, so you're not alone if you find on-chain data a little much.
With that in mind, I thought I'd have a go here at [over]simplifying it, and hopefully make on-chain more relatable for you, if you're so inclined.
It's a longish read but if you cbf reading it all, here are some quick cheat sheets to sum it all:
A summary of some commonly used on-chain metrics and how to interpret them.
A summary of the flow between Demand, Liquid Supply and Illiquid Supply.
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Back to first principles: there are 3 things price can do. Up, down, sideways. No shit!
But how does on-chain data help us know what to expect?
DEMAND (Buyers)
New market participants drive every bull run. It’s always been that way, and will always continue to be. Unfortunately, on-chain data struggles to help look ahead to what demand might be coming in, but it is great at looking backwards.
Backwards looking metrics for DEMAND could be:
Short-term HODLer (Coins held for <156 days) supply - when STH supply is increasing while LTH supply is stable, this is likely to mean new investors have entered Bitcoin.
Long-term HODLer (Coins held for >155 days) supply - drops in LTH means decreasing demand from people who traditionally HODLed.
New entities and New addresses - this is self-explanatory, but it's important to use this directionally only. Glassnode has a hard time knowing if a new address is just a new wallet from an old holder, but if this metric is going parabolic, it's almost certainly bc of new market participants.
Google Trends, crypto Youtube views/subs (a Ran metric) and general engagement across crypto socials is also a great way to see if crypto is recruiting new money.
When new investors enter the market, number go UP. When current investors don't want their coins anymore, number go DOWN. How much? Well, that depends on how much is available to buy, which brings me to...
LIQUID SUPPLY (Sellers)
Often analysed right now is the declining volume of BTC being held by liquid entities. That is, if a bunch of new people wanna buy, there probably won’t be enough to go around.
In isolation, declining liquid supply means number go SIDEWAYS or UP.
In terms of what it means for upward pressure. The magnitude of the supply squeeze determines to degree of upward price movement when multiplied by the new market participants (new demand).
The sideways part is important. People disregard that, but limited supply is irrelevant if there isn’t increased demand. And the way this is measured is primarily though LTHs. This means liquid supply can decline w/o and buying. So price doesn’t necessarily have to increase as this decreases.
Some measures for LIQUID SUPPLY:
Balance on exchanges - The most liquid supply there is.
Short-term HODLers (Coins held for <156 days) supply or STH % of supply - A large percentage of this cohort is risky because traditionally this group is more likely to sell BTC. They represent more liquid supply.
Profit metrics like SOPR, NUPL and % in profit/loss can be good to get a feel for the mindset of STHs and anticipate the likelihood of their supply becoming illiquid. If we're finding that STH are selling as soon as they reach breakeven, it's a good indication they won't be migrating to LTHs any time soon so we will struggle to see sustained price growth.
Open interest and funding rates - These aren't on-chain metrics but in the event of quick price moves, this indicates how much that move will be accelerated by stop losses or liquidations. High long funding + price declines brings new sell orders (new liquid supply) = quick dump. These are freely available from Bybt.com.
Many analysts will aggregate cohorts into Illiquid, Liquid and Highly Liquids Supply groups.
ILLIQUID SUPPLY (HODLers)
And now to Long-term holders AKA strong hands AKA illiquid supply. This is your measure of what happens when it all falls to shit. That is, how much we will dump in the event of a sell-off.
So in a bull run, if this starts declining (ie. LTHs sell), it means more supply is becoming available to meet demand. Eventually this selling has a slowing effect on price which negatively impacts fresh demand and when that declines, you have what they call a blow-off top.
LTHs sell into bull runs until demand no longer meets the over-supply causing a blow-off top.
In a neutral or declining market, then it can indicate if a May 19-like dump is coming.
You can also look at profit metrics like SOPR, profit/loss or NUPL to get a feel for if LTHs may be reaching a profit-taking price zone. If this is the case, we can anticipate sell pressure ahead, therefore a decline in illiquid supply.
Measures to watch for ILLIQUID SUPPLY:
LTH supply or LTH % of total supply
LTH in profit/loss or LTH NUPL to understand potential if they might sell soon.
Miner net position change - if miners are selling, illiquid supply is becoming liquid.
Open interest and funding rates. These aren't on-chain metrics but in the event of quick price moves, this indicates how much that move will be accelerated by stop losses or liquidations. High short funding + price increases brings new buy orders (less supply) = quick pump. These are freely available from Bybt.com.
When LTHs reach high-profit zones, we can expect upcoming sell pressure.
Miners displaying sell pressure means we can expect less ILLIQUID and more LIQUID supply to come.
But as mentioned earlier, an increase in strong hands in isolation doesn’t mean number go up necessarily. Maybe a little, but nothing like what we’d need to reach $100k.
What we need for $100k+ is new market participants. That’s it. That’s why we keep talking about ETFs, Walmart, Amazon, Apple, etc. Because something significant needs to happen to convince people to buy BTC for the first in their lives at $50k+.
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I've seen a lot of criticism of on-chain analysts saying they've been wrong. It's possible that at times they misinterpret some data. But on-chain data isn’t right or wrong or misaligned to price. It's just an incomplete view because it doesn't truly show demand dynamics.
Yes, this is an over-simplification and there's a lot of nuance. But for me, it just helps frame my interpretation of all this amazing data and its expected impact on price. The cheat sheets aren't exhaustive by any means. My hope is this info is helpful to you in being able to draw your own conclusions from the data shared by some of the analysts out there. If you have any questions about this, I'll be happy to discuss.
But to give you the answers to the test:
Liquid supply is very low and Illiquid supply is at an ATH. If (and it's an if!) we can get some fresh new demand into crypto, NUMBER GO UP BIG.
Credits for charts go to TXMC on Twitter: https://twitter.com/TXMCtrades?s=20. Charts have been used with his permission.
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