Last week we released the second part of the crypto fundamental analysis trilogy, which revolved around project metrics you should pay attention to when conducting fundamentals of a crypto project. In case you haven’t yet read the first and second part of the sequence, we recommend you to first check them out and then come back to go over the third part.
The third part will focus on blockchain metrics, which can be found by looking at data provided by the blockchain. This data could be obtained by running a node for the desired network and then exporting the data, but this way would waste too much precious time. If we're looking for blockchain data for the sake of the investment, a far more sensible option would be to find the information from websites or application programming interfaces (APIs) that provide tools specifically for the purpose of helping empower your investment decisions. Let’s take a look at which these factors are, where you can find them and how they can help you evaluate a crypto project!
Status and Active Addresses
Active addresses are active blockchain addresses during particular periods of time. One of the simplest approaches is to total the number of sending and receiving addresses over various periods. Add up the active addresses over a period of days, weeks, or months and compare the growth or decline during different periods of time to get a feel of the direction in which the interest for a particular coin is moving. For some of the bigger projects, online on-chan data aggregators, such as Glassnode, offer visual graphs that represent how the number of active addresses is moving. An example for Bitcoin can be obtained from the picture below.
Another useful metric that can help you measure the activity taking place on a network is transaction count. By seeing how the total amount of transactions is moving with time, we get to see how activity changes over time. As one could assume, the graph of total transactions resembles the graph of active addresses to some degree. Keep in mind that both metrics need to be taken with a grain of salt, as we can never be sure how many participants are just transferring funds between their own wallets or creating new wallets to inflate the on-chain activity.
Transaction value is another helpful blockchain metric for crypto fundamental analysis. It can help us determine how the ‘popularity’ of a particular coin is moving is transaction value. Since it tells us how much value has gotten transferred in a given timeframe, it indicates potential further growth or lack of it.
Transaction value is basically a transaction volume, as it simply adds up the value of all the transactions within a period. For example, if there were 10 Bitcoin transactions within the same day, each of them worth 1000$, the daily transaction volume would be $10 000. While the value transacted is usually calculated in dollars, it could also be measured in the protocol’s native unit (Bitcoin - in the case of the previously outlined example).
By dividing a coin’s market cap by the daily transaction volume you can help you gain an even better insight into a situation on a relative basis. It is called Network Value to Transactions Ratio (NVT) and can help you determine whether a particular coin is getting over or undervalued. Since the concept is based on the assumption that the more value is moving around the system, the more value the project has, in case a coin’s market cap increases while daily transaction volume lags it could point towards overvalued conditions. Contrarily, if the price of a coin decreases, while daily transaction volume increases, it may signal a good buying opportunity.
One on-chain metric that can be very useful with some crypto projects and more or less useless with others is feed paid. The fees users pay can indicate demand, as paying higher fees signifies bidding for their transactions to be confirmed sooner (while those with lower bids will need to wait longer). Again, keep in mind that this logic doesn’t apply to all cryptocurrencies, as it can only be helpful when it comes to cryptos with decreasing block rewards, such as Bitcoin. You can access each network's fees for the past 24 hours or 7 days by visiting a very handy website called Crypto Fees.
However, keep in mind that lots of blockchains are built with low fees in mind, which can make a comparison between different blockchain based on fees paid not only futile, but also misleading. Fortunately, you can look at this in conjunction with the transaction amount or other data in order to look at numbers on a relative basis.
Hash rate and the amount staked
While the first cryptocurrency - Bitcoin achieved consensus through the Proof of Work mechanism, nowadays cryptocurrencies use many different consensus mechanisms, Proof of Stake being the strongest alternative.
Hash rate is often used as a measure of network security in Proof of Work cryptocurrencies. A hash rate reflects how fast users can mine a block on the blockchain. The higher the hash rate, the better the chance of getting a block reward, which makes it harder to perform a successful hack. Therefore a higher hash rate suggests that it is more difficult to successfully carry out a 51% attack. Security isn’t the only useful insight investors can obtain from a hash rate. An increasing hash rate can also point to growing interest in mining, likely as a consequence of lowered operating mining costs and/or higher profitability.
While the Proof of Work mechanism requires miners to solve cryptographic puzzles, the Proof of Stake mechanism requires validators to simply hold and stake tokens in order to validate transactions. The amount staked can be used to measure the security of a network in Proof of Stake cryptocurrencies. The more holders that stake, the more secure the network becomes. As more validators process transactions and check other validators’ work, malicious actors and modified blocks can be dealt with increasingly efficiently. Additionally, we could also look at the amount staked to monitor interest in particular cryptocurrency.
Blockchain records all the crypto action, therefore it can be a valuable source of information. It can give insight into factors about an asset’s activity and underlying technology and processes. There is limitless on-chain data that can be obtained using different websites, but not all of them carry the same importance. We hope that this blog helped you filter out irrelevant metrics and gave you insight into metrics that play a significant role in determining the futures price of a coin of a project you’re trying to evaluate. Although blockchain metrics can seem challenging at first, once you know which are important and where they can be found, the process of their interpretation becomes rather simple.
You’ve reached the end of the trilogy, which means you’re equipped with all of the tools essential for an evaluation of a crypto project. Now it’s time for you to get to work and put those principles to action, by performing as many fundamental analysis as possible. Performing crypto FA like a pro doesn’t come naturally and needs to be learned through repetition. Keep in mind that diligence is the mother of good luck, therefore you need to put in the work if you want to step up your trading game, pick the ultimate winners in the crypto race and profit (which envious people will ascribe to luck). Anyway, our team knows that there is always an element of actual luck present when conducting investment decisions because of the unpredictability of the markets, therefore we wish you all of the luck on your crypto journey as well.