Article 7.4: OnChain Analysis for Beginners:
Understanding Wallets, Transactions & Whale Movements
On-chain analysis is a method of evaluating cryptocurrency market trends by studying blockchain data. Since blockchains are transparent and immutable, every transaction, wallet balance, and movement of funds is publicly available. Unlike Technical Analysis (TA), which focuses on price charts and patterns, or Fundamental Analysis (FA), which looks at project fundamentals, on-chain analysis allows traders to track real-time market behavior directly from the blockchain.
Understanding on-chain data can provide valuable insights into investor sentiment, market cycles, and potential price movements. For example, large Bitcoin withdrawals from exchanges often signal long-term accumulation, while significant deposits indicate potential selling pressure. This guide will break down the core components of on-chain analysis, including wallet structures, transaction tracking, whale behavior, and key on-chain indicators.
1. Understanding Crypto Wallets & Blockchain Transactions
At the heart of any blockchain is the concept of wallets and transactions. A wallet in crypto is essentially a public address on the blockchain, which can store, send, and receive assets. Every wallet has a public key (address) and a private key. The public key functions like a bank account number, allowing others to send funds, while the private key acts as a password that grants control over the funds.
Public vs. Private Wallets
There are two main categories of wallets: custodial and non-custodial. Custodial wallets, such as those provided by centralized exchanges like Binance or Coinbase, manage private keys on behalf of users. These are convenient but come with risks, such as potential restrictions or exchange hacks. On the other hand, non-custodial wallets like MetaMask, Trust Wallet, or Ledger hardware wallets give users full control over their private keys, making them more secure but requiring careful key management.
A key aspect of on-chain analysis is monitoring wallet activity. If large amounts of cryptocurrency are moved from exchanges to private wallets, it usually indicates long-term holding, which is considered bullish. Conversely, when large amounts are deposited onto exchanges, it suggests a potential sell-off, which can be bearish.
For example, during the 2021 Bitcoin bull run, on-chain data showed a sharp increase in exchange outflows, signaling accumulation by long-term holders. This data gave traders confidence that the rally could continue.
2. How Blockchain Transactions Work & How to Track Them
Every blockchain transaction is recorded in a block and added to the distributed ledger. A transaction consists of a sender address, receiver address, amount transferred, and network fee. Once confirmed, it becomes a permanent part of the blockchain.
To track transactions, traders use block explorers, which allow them to analyze transaction history and wallet activity. Some popular block explorers include:
Ethereum transactions: Etherscan
Bitcoin transactions: Blockchain.com Explorer
Solana transactions: Solscan
Binance Smart Chain transactions: BscScan
If a trader wants to check whether a large transaction has been processed, they can enter the Transaction Hash (TxID) into a block explorer. This TxID serves as a unique identifier, showing the sender, receiver, and confirmation status.
A key insight that on-chain analysis provides is exchange inflows and outflows. Exchange inflows indicate that traders are sending coins to exchanges, likely for selling, while outflows suggest withdrawals into private wallets, signaling long-term holding. By tracking these movements, traders can anticipate market trends before they reflect in price charts.
3. Whale Movements & Market Impact
In crypto markets, whales—wallets holding large amounts of a particular cryptocurrency—have a significant impact on price movements. A whale can be an individual, an institution, or even a crypto fund that holds enough tokens to influence market sentiment.
Why Do Whales Matter?
Whales have enough capital to create volatility by placing large buy or sell orders. If a whale deposits 10,000 BTC to an exchange, traders assume they may be planning to sell, leading to panic selling and a price decline. Conversely, when whales withdraw large amounts of BTC from exchanges, it signals accumulation, often driving prices higher.
Tracking whale movements helps traders anticipate liquidity shifts and avoid getting caught in major market swings. Some popular tools for monitoring whales include:
Whale Alert (whale-alert.io) – Provides real-time notifications of large transactions.
Nansen (nansen.ai) – Labels smart money wallets and institutional transactions.
Glassnode (glassnode.com) – Tracks accumulation, selling pressure, and market trends.
During the 2020 Bitcoin bull run, on-chain data showed whale wallets accumulating BTC below $10,000 months before prices surged past $50,000. By tracking this behavior, traders who followed these signals were able to enter early before the rally took off.
4. Key On-Chain Metrics for Trading
On-chain analysis provides several powerful indicators that help traders assess market strength and potential price movements. Some of the most important metrics include:
A. Active Addresses
Active addresses measure the number of unique wallet addresses interacting with the network daily. If the number of active addresses is rising, it suggests increased adoption and usage, which is bullish. If active addresses decline, it indicates lower market participation, which can be a warning sign for a market cooldown.
For example, in May 2021, Ethereum’s active addresses reached an all-time high during the peak of the DeFi boom. Shortly after, the market corrected as activity started to decline.
B. Network Value to Transactions (NVT Ratio)
The NVT ratio is similar to the price-to-earnings (P/E) ratio in stock markets. It measures a blockchain’s market cap relative to the transaction volume. A high NVT ratio suggests that the network is overvalued, while a low NVT ratio signals that the asset is undervalued.
Historically, Bitcoin’s NVT ratio tends to peak before market corrections, acting as an early warning system for potential bubble formations.
C. HODL Waves
HODL Waves track the age distribution of coins held in wallets. If a large percentage of Bitcoin supply is held by long-term holders (1+ years), it suggests strong conviction and reduced selling pressure, which is bullish. On the other hand, an increase in short-term holders suggests that speculation is driving the market, making it more volatile.
Before Bitcoin’s 2020 rally, on-chain data revealed that over 60% of BTC supply had not moved for more than a year, signaling that long-term holders were accumulating in preparation for a major price increase.
D. Miner Activity & Hash Rate
Bitcoin mining is an essential part of network security. A rising hash rate indicates a secure and growing network, while a falling hash rate can signal miner capitulation, which may lead to selling pressure.
Miners sometimes sell BTC to cover operational costs, causing temporary dips in price. Tracking miner selling activity provides insights into potential short-term corrections.
Conclusion
On-chain analysis is a powerful tool that allows traders to track wallet movements, transaction flows, and network health. Unlike technical indicators, which rely on past price action, on-chain metrics provide real-time insights into market behavior and investor sentiment.
By understanding wallet structures, transaction patterns, whale activity, and key indicators like active addresses and NVT ratio, traders can make better-informed decisions and anticipate price trends before they materialize in charts.
When combined with Technical and Fundamental Analysis, on-chain analysis becomes a game-changing strategy for navigating the volatile crypto market.