Analyzing cryptocurrency markets may seem easier than traditional markets because blockchain technology has more built-in transparency, enabling anyone to analyze and audit on-chain data.
Simultaneously, however, there are challenges to zeroing in on forward-looking numbers that give insights into current and future price trends. Philip Gradwell, chief economist at the blockchain intelligence firm Chainalysis, joined CoinDesk earlier this week to discuss the five must-track on-chain indicators for all traders.
“The first indicator that I look at every day is exchange inflows,” Gradwell said.
Investors typically transfer coins from their wallets to exchanges when they want to liquidate their holdings and take direct custody of their holdings when they have a bullish view on the cryptocurrency.
A surge in inflows in a rising market could be considered a sign investors lack confidence in the uptrend. “When you see large inflows, it’s time to be cautious,” Gradwell added.
Also read: Bitcoin Risks Deeper Price Pullback as Exchange Inflows Spike
Nonetheless, inflows do not imply immediate liquidation. Investors can hold their coins on exchanges for as much time as they want.
“Historically coins have been liquidated with a lag of 12 to 36 hours,” Gradwell said, adding that during the March crash there was panic selling.
Thus, this indicator is just one piece of the puzzle because we don’t know when the transferred coins will be sold. What’s more an uptick in inflows or selling pressure is often matched by an equal or more substantial buying pressure.
To determine the impact of exchange inflows on the supply side, investors should keep an eye on the demand side with the help of the “trade intensity” metric, which measures the number of times an inflowing coin is traded.
“It tells us how many people are willing to buy bitcoins sent to exchanges,” Gradwell said. An uptick in trade intensity shows that buyers are outweighing sellers and it is a sign of trend strength.
Bitcoin jumped over 7% to 15-month highs above $12,300 on Wednesday. Amid the price rally, cryptocurrency exchanges tracked by blockchain intelligence firm Chainalysis received a total of 106,519 BTC on Wednesday, the highest daily inflow since Oct. 2.
However, the rise in inflows failed to apply the brakes to the price rally because demand was strong. Bitcoin’s trade intensity jumped to a two-month high of 5.8, more than double the 90-day average.
Also read: Back at $13K: Bitcoin Unfazed by Profit Takers After Rise to 2020 High
While exchange inflows and trade intensity help gauge short-term market conditions, the remaining three indicators are more about long-term trends.
Investors can buy cryptocurrencies with fiat currencies like the U.S. dollar or use dollar-backed stablecoins like tether to fund purchases.
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