Bitcoin (BTC) has been the most interesting asset over the last decade and on-chain analytics can prove such a statement. Since its inception, and until the first quarter of 2020, Bitcoin has increased over 1,000,000% in value, climbing from $0.05 to around $10,000. However, it is also true that Bitcoin, or any other cryptocurrency for that matter, has ever faced a great recession or depression during its brief history. At least, it has not faced one in its entirety, since Bitcoin was born in 2009 in the middle of the financial crisis.
Today, we aim to explore some key metrics that translate into adoption. Our goal is not to focus on technical analysis per se, but to look into on-chain metrics and see how they can impact the current and future price of BTC.
I hope you’re as excited to find out what drives Bitcoin prices as I am eager to tell you. Ready to dive deep into Bitcoin’s future during the new roaring 2020s?
This article was written by Pedro Febrero, with primary co-editing done by Mati Greenspan, founder and CEO at Quantum Economics, and Charles Bovaird, senior contributor for Forbes and vice president of content at Quantum Economics.
Doing on-chain analytics like a pro
First off, let me define what we mean by “on-chain analytics.” Instead of focusing on price and traditional technical analysis techniques, we’ll look into all data that is natively stored on the blockchain.
This data includes (but is not limited to):
- Details of every block (timestamp, fees, miner rewards, block weight, addresses, users, etc.)
- Details of every transaction (sending and receiving addresses, the amount transferred in each transaction, the remaining addresses, block time, etc.)
- Smart contract invocation and usage (mostly for Ethereum and Ethereum-based tokens).
In other words, the on-chain transaction volume is being used to judge whether a crypto asset is actually being used, and when and how that impacts its price and value.
Instead of just crudely measuring the overall usage of a cryptocurrency network, I think we may use on-chain transaction data to figure out who is using Bitcoin, how they are using the network, and when certain metrics point to either bullish or bearish seasons.
In sum, our objective is to translate key blockchain metrics into price appreciation metrics so that we can use them to predict important price movements.
What metrics are we looking into?
A great starting point is all the variables directly linked to the blockchain. Initially, we are looking into the four most basic, yet crucial, on-chain metrics available:
- Addresses — as in the amount each address holds, the length of time the amount has been held, and individual behavior.
- Transactions, as in the number, amounts transferred and total volume.
- Unspent transaction output (UTXO), as in the percentage of holders in profit, the total value created and the total value spent.
- Blocks — as in block height and block weight, or the actual size in bytes of both the total blockchain and a single block.
There are plenty of other metrics we’ll put together in the future, as we would like to perform a comprehensive analysis of three distinct groups: transaction data, exchange and market data, and mining and fees data.
Bitcoin transaction data
The very first on-chain data points we’ll be analyzing relate to transaction data. Our core focus will be transaction count and volume, and how these metrics relate to Bitcoin price appreciation.
Looking at the chart above showcasing the number of transactions per day from 2010 to February 2020, we can quickly see the trend is quite positive. Some important takeaways are:
- Transactions peaked at close to 490,000 per day in December 2017.
- Transaction count reached a low of approximately 132,000 transactions per day at the beginning of August 2017, and then peaked at around 500,000 transactions in mid-December 2017.
- Daily transaction value at the end of February 2020 was well over $3 billion.
- Daily transaction value increased over 200% from a low of $1 billion during April 2018, while price only increased around 2% in the same period.
What becomes very clear from the data is that the correlation between price and transaction value seems to be deteriorating. While in the past, daily transaction value was increasing more or less according to price, the correlation seems to be less relevant today. Hence, the delta between price growth and daily transaction value growth seems to be increasing.
To prove our point, let’s take a look at the total Bitcoin transfer volume.
What we notice is the following: As price increases, total volume increases as well. However, since less Bitcoin is needed to achieve the same dollar equivalence, we could expect either fewer transactions with increased value or additional transactions with less value.
During bullish periods, value increases exponentially, while total value diminishes significantly in bearish periods, as expected.
Hence, in terms of transaction data, what we conclude is that while the total number of Bitcoin transactions has been steadily increasing, volume seems to be much more volatile, meaning the current price of Bitcoin is a speculative one.
Bitcoin address data
Bitcoin addresses show the behavior of BTC holders. The main data we’ll be looking into is the number of active addresses and how much each one holds. Such metrics may help us understand how people behave during bullish and bearish seasons.
The first chart we need to look at is the number of active addresses. It not only shows an increasing interest by people in general, but the drop between late 2017 high to the present isn’t too significant. Essentially, the number of active addresses fell about 25%, while Bitcoin price dropped a whopping 66% in the same period.
This suggests that long-term users of the cryptocurrency care little about price swings.
Additionally, let’s compare the above to the number of total addresses. How do you think it has been growing in terms of non-zero balance addresses?
If you answered “exponentially,” you would be correct.
Even though this metric cannot be linked to the number of active users, it clearly shows how much the network is being used.
Otherwise, the number of addresses created shouldn’t be as great. Further, let me finalize the addresses section by looking at two additional metrics: the number of addresses holding over one BTC and the number of addresses holding over 1,000 BTC.
The above chart shows the number of addresses holding over one BTC. It seems the growth rate increases by a factor of one every year. Interestingly, since the December 2017 price peak, the number of addresses holding over one Bitcoin has increased by close to 10%, from 718,000 to 787,000.
This simply means more people want to hold a single Bitcoin.
What about the number of institutional investors? Do you think they have been interested in buying or selling Bitcoin? Let’s take a look.
The chart above showcases the number of addresses holding over 1,000 Bitcoin. We can clearly see that even though there was a sell-off during 2017 and 2018, institutions have still been buying afterward. Heavily.
Since early 2019, the number of addresses holding more than 1,000 BTC has increased by over 50%. Essentially, it went from under 1,750 addresses to a high of nearly 2,250 addresses.
There are not likely many people with the capability to have purchased such an incredible amount of Bitcoin since 2019. Hence, probabilistically, such addresses are likely associated with institutions.
Do you personally think whales represent smart or dumb money, generally speaking? If you answered “smart money,” then you already have a strategy laid out: Follow it.
To conclude this section, I’ve shown how total addresses are not only growing in number, but also in value: The number of holders with over one Bitcoin is almost doubling every year, and the amount of institutions holding over 1,000 Bitcoin has increased by over 50% since 2019.
Bitcoin UTXO data
Data for unspent transaction output, or UTXO, is one of the most interesting sources of information to look into, at least in our opinion. For starters, it helps us understand the long-term behavior of Bitcoin holders, which comes in handy as our goal is to predict when to buy and when to sell.
UTXO shows the addresses that have received BTC and not spend it afterwards.
Let’s start with the Hodl Waves chart.
For reading the graph above, allow me to use Unchained Capital’s own definition:
“The colored bands show the relative fraction of Bitcoin in existence that was last transacted within the time window indicated in the legend. The bottom, warmer colors (reds, oranges) represent Bitcoin transacting very recently while the top, cooler colors (greens, blues) represent Bitcoin that hasn’t transacted in a long time.”
The chart’s main points of interest seem to be the following:
- The number of enthusiasts holding for between three and five years, or for five years or more, has been showing the fastest growth rate. At the time of writing, the two groups combined represent more than 20% of all Bitcoin addresses. It’s incredible that so many folks have been holding for such a long period of time, considering the short life of the token.
- Price appreciation peaks are always followed by major sell-offs. The number of addresses holding Bitcoin for less than one year during these periods substantially increased. At the time of writing, about 40% of all addresses have traded Bitcoin in the past 12 months.
Hence, what we can expect is that smart money will accumulate during bear markets and sell during bullish seasons. Much like what I concluded in the previous point when looking into the number of addresses holding over 1,000 BTC.
Bitcoin block data
Before we conclude this piece, we would like to take one last dive into the Bitcoin blockchain data. This time, we’ll look at blocks.
We believe the starting point should be block weight. How much data does each block hold, on average? To answer such a question, we’ll turn to our pals over at Bitinfocharts, one of the best repositories for blockchain charts.
At 1.2 megabytes, Bitcoin’s block weight, or the number of bytes of each block in the Bitcoin blockchain, is currently reaching its maximum.
Block size peaked during late 2017 and early 2018, before many exchanges and other key players adopted Segregated Witness, or SegWit, shown below. The data shows an increasing adoption of SegWit, which removes the signature data from the block header, freeing up space for additional transactions.
The really interesting thing we noticed from observing this data is that it seems to correlate with the graph above.
Starting in October 2017, SegWit started getting adopted. Today, over 50% of all players use SegWit addresses. At the same time, block size started dropping in late 2017.
Hence, it seems Bitcoin is further developing key improvements to its working mechanics, allowing for more transactions per block. Such improvements may accommodate more users, which may help with furthering adoption.
Lastly, let’s take a look at the block height, which adds the previous blocks.
What this data shows is that not only has the Bitcoin blockchain been working nonstop for the past ten years, but over 600,000 blocks have been created.
In addition, the last time price touched the block height line, a massive bull run took place, taking BTC from less than $0.01 to nearly $8,000.
If history rhymes, we could potentially see Bitcoin making way for brand new highs during late 2021, early 2024 and late 2027.
Looking at some key metrics relating to Bitcoin transactions, addresses, UTXO and blocks, we conclude that we’re in for an exciting couple of years.
Arguably, the latest price drop that took Bitcoin below $5,000 on CoinMarketCap provided our last opportunity to purchase BTC below $10,000. Especially since the halving is almost coming. Hence, let me summarize this article’s findings:
- Transactions are not only increasing, but the amounts being transferred are as well. The impact on price appreciation has been quite positive during the past 10 years.
- The number of total addresses is growing as well as the amounts held by both dumb and smart money. Hence, there has been a positive impact on price.
- A great deal of Bitcoin is locked away by holders who only sell near peaks, meaning there’s little room for further falls until a new high is reached.
- Blocks are getting full and new techniques are allowing for more transactions to be added per block.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision.