A Whole New World of Analysis … and Opportunity

In this week’s Weiss Crypto Sunday Special, host Chris Coney and Weiss crypto analyst and blockchain expert Marija Matic took a deep dive into the chain ... the blockchain, that is.

The blockchain is the technology that makes crypto possible, recording each and every transaction. And because the blockchain is transparent, it opens a whole new field of analysis.

So, just what can be found on the chain, and how can it help investors? Today, we’re going behind the scenes — and screens — to see how our Weiss crypto analysts are using on-chain metrics.

Chris Coney:

Hi there, guys, and welcome to this week’s edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. My guest analyst today is Marija, and the macroeconomic topic that we will be discussing is on-chain metrics.

It’s one of my favorite topics, at least at the moment. This whole field of analysis has cropped up and is exclusive to crypto. When we say “on-chain,” we mean on the blockchain. And because blockchain technology is transparent, it allows us to do this whole new field of analysis.

So, Marija, please start us off here. When we say “on-chain metrics,” what exactly are they, and why do they matter?

Marija Matic:

Hi, Chris. When we say on-chain metrics, it means the information which we can extract from the blockchains. Since majority of the blockchains are transparent, there’s a ton of information which we can extract from there related to the transactions, to the usage of the centralized applications, the flow of cryptocurrencies, etc. So, there are many things which are very important.

Chris:

So why does this data matter? And what kind of things can they tell us, this data on the chain?

Marija:

Well, they can help investors. For example, if you have invested in a token, you would be interested to know if the usage, and if the number of the transactions are growing or falling.

If you have invested in, for example, a governance token of some decentralized application (dApp), you would be interested to know how that decentralized application and its token are performing. You would be interested to know if the number of active wallet users growing or falling? And there’s all sorts of information that’s very important to investors.

There are things which are important to traders. For example, you can find out the inflows or outflows of cryptos from and to centralized and decentralized exchanges. So, you can know if a majority of investors want to sell their crypto — if there are large inflows — or if they’re just buying and accumulating and sending them to their wallets. You can look at the dormant wallets — very large wallets dormant for, I don’t know, seven years or more. You can track if they’re moving, if people are spending from those wallets, if the old HODLers — very, very long-term investors — are selling or not. So, there’s a ton of information you can find out, and it’s quite important.

Chris:

So that’s the bit I’ve seen passed around a lot recently. The flows in and out of major exchanges. So, I suppose with like, Bitcoin (BTC, Tech/Adoption Grade “A-”), if people are generating a new address — which is what individuals do — every time they receive a transaction, it’s kind of hard to track that.

But with exchanges, it’s a bit different. With my exchanges, they give me a single Bitcoin address for all my deposits, right? So, in that instance, you’d know that wallet belongs to a particular exchange, then you could see how many Bitcoin were flowing into that. Or, if it were a stablecoin, you could see how much Tether (USDT) was flowing in or out.

And what most people were saying recently is if a lot of Bitcoin, let’s say, has been taken off centralized exchanges, the assumption is that people aren’t intending to sell it in the short term. Is that basically it?

Marija:

Yes, that’s true. For example, we are tracking lots of things at the Weiss analytical department, and in the last week we’ve seen many, many outflows. More outflows than inflows. And we’re also tracking specific exchanges, like Coinbase, Inc. (Nasdaq: COIN), Binance (BNB, Tech/Adoption Grade “C-”) and Wabi (WABI).

We know that Coinbase is mostly used by institutions, and we know that Binance is mostly used by retail investors. So, we can check who is accumulating more at the moment. Is it institutional investors, is it retail, etc.? We can check some of the Chinese exchanges where we can see how the miners are. Are they selling or not?

Two weeks ago, we saw a lot of accumulation by both retail and institutional investors when it comes to Bitcoin. But when it came to Ethereum (ETH, Tech/Adoption Grade “A-”), Chainlink (LINK), Binance, Dogecoin (DOGE, Tech/Adoption Grade “B-”) and Litecoin (LTC, Tech/Adoption Grade “B-”), we’ve noticed that there were many inflows to exchanges since those coins were reaching all-time highs and jumping like crazy, while Bitcoin was kind of stagnant. And that’s why people were probably depositing them to exchanges to try to time the top or just to be prepared. It’s a normal reaction.

Chris:

That is interesting. So that would suggest if, say Litecoin, runs up in price, you’d see this big inflow of Litecoin into exchanges because people are preparing to take profits?

Marija:

Exactly. They’re just preparing to take profits, which doesn’t necessarily mean that they will sell, but it’s what it is. And it’s a usual reaction when the coin is being like this on the chart-

Chris:

Sideways.

Marija:

It means that people are, yeah, sideways. People are accumulating and using ... you can see a lot of outflows.

Chris:

Okay. That was interesting what you said about Coinbase providing services to institutions and so on. So that’s actually how we start to ... I mean, it’s not absolutely precise, but it gives us some indication whether it’s institutions or retail investors or what’s happening. So, the other thing I was going to say is when we see, say, outflows of Bitcoin from Binance, do we know where that’s going? I mean, we assume people are putting it in their ledger, I suppose, but do we know where that’s going?

Marija:

Yeah, we can see where it’s going. We can track it. We don’t currently track specifically where the Binance funds are going, but yeah, it’s possible to track. The most important thing for me is to track are the decentralized applications — how they’re performing since they are now the big thing and their governance tokens. This is what’s very, very important.

At the same time, we can also see that there is a huge outflow or shift from the number of Bitcoin and Ethereum held, especially Ethereum, held on centralized exchanges, to a DeFi. So, people are definitely going non-custodial, which is amazing.

If you look at the charts, you will see that the number of Ether on centralized exchanges is falling down. There’s very, very little Ether on centralized exchanges right now. Same with Bitcoin. But if you look at the supply of Ether, which is being used non-custodially on the DeFi, it’s just growing. So, it’s an amazing thing.

Chris:

Right. So, there is a bit of sophistication to this analysis, right. And actually, I challenged some of this that was going around Twitter, Inc. (NYSE: TWTR) because the assumption is, “Oh, the Ethereum is moving off exchanges. Therefore, people are going to HODL it.” And I’m like, “Well, that’s not very sophisticated,” because what if the Ether is being removed, like you just said, from Binance to Uniswap (UNI) or some sort of decentralized finance (DeFi) application? Well, someone can still sell it over there, right. So, they might still intend to sell it ... just on a decentralized exchange.

Marija:

Yeah. The point is most of the Ethereum, like huge billions worth of Ethereum, are locked. They get locked in DeFi. It’s not just being HODLed and swapped. There’s very long-term staking happening right now in Ethereum to zero since people cannot remove it. There’s like, I’m not sure how much, but maybe about 4% of the supply of Ethereum is already locked there. It cannot be removed until the next phase of Ethereum comes. So, there are certain ways to check how much is locked. And usually, people who lock Ethereum, they don’t tend to sell. They just chase higher yields. They may unlock it to lock it somewhere else, things like that. So yeah, more and more Ethereum’s getting locked.

Chris:

What I like about on-chain metrics and public blockchains, in particular, is that they help level the playing field between institutional investors and retail investors.

Typically, there would be like a hierarchy in terms of access to better, faster, deeper information in the markets. Whereas on-chain metrics are open to everybody. People say, “Data is the new oil,” which is fine, but if you can’t access that data, then it’s not a level playing field.

So, there are tons of free applications out there now where you can query the on-chain data, and anyone who is either a retail investor or institutional can get that information. And there’s now a whole bunch of content creators providing commentary on the on-chain metrics as well. I don’t know if you’ve seen any of that?

Marija:

Yeah, that’s quite amazing. The retail investors have this completely transparent access to the blockchain data, and the point is, do they know how to use it? You need certain level of knowledge in order to dig and find the information that you need. So that’s why some retail investors are going for paid services where that information is kind of systemic. It’s collected and represented in a systemic, systematic manner, so it makes sense.

Chris:

Yeah. There was the point you made just there about sophistication. You could just look at [on chain data] that says, “Oh, the amount of crypto on exchanges is falling,” and then leave it at that. Whereas, well, it’s not that simple. You need to combine it with other data, and if you don’t know what you’re doing, you can’t get any meaning of it. You might actually make it come to a conclusion that’s wrong if you don’t know what you’re doing.

The last thing I just want to touch on is privacy-oriented cryptos. They’re more difficult to do on-chain metrics on. Is that right? Because a lot of the transactional data on private coins are private because they’re private. I suppose that screws with on-chain analysis.

Marija:

Well, it depends. For example, Monero (XMR, Tech/Adoption Grade “C+”) is private by default, so we cannot really analyze it. We can’t analyze anything on Monero. But if you’re talking about cryptocurrencies that have optional privacy, like Dash (DASH, Tech/Adoption Grade “C+”) or Zcash (ZEC, Tech/Adoption Grade “B-”), we can track lots of info.

Quite interestingly, when people are faced with option privacy, they usually decide to don’t use the privacy features and just go bare and transparent. And so, like, I don’t know, 95% of Dash or Zcash users actually aren’t using the privacy features. And this is a problem for the rest of for the remaining 5% who are using the privacy features since it’s de-anonymized them — it makes them less anonymous due to the technology and the way it works.

So for me, I wouldn’t choose those coins if I want to use privacy coins. Monero or some other cryptocurrency (which is private by default) would be my choice if you don’t want any information to be transparent.

Chris:

There’s one thing I want to make clear for the viewers here: When we’re talking about analyzing the blockchain and people say, “Oh, is Bitcoin private?” We’d say it’s pseudonymous. It’s sort of private but sort of not private.

So, what the heck does that mean? Well, like I said earlier, the reason we know that money is flowing to exchanges is because they’re reusing their addresses. So, we can know that’s Binance’s Ethereum address, for example. But I don’t want the viewers to get the wrong idea that somehow the on-chain analysis can uniquely identify them. It can’t do that, can it?

Marija:

When I’m talking about this de-anonymization of the users, I’m not talking about the names and surnames and real de-anonymization. I’m talking about the time when the transactions were done. I’m talking about the address from which it was done to another address. And when I’m talking about the address, it’s just the string of random numbers and letters. It’s not like a physical address. It’s not a bank account like which bank it is, or it can be connected to the particular user. But some people want to go private so that not even this information is out there.

But when we’re talking about pseudonymous, or the level of privacy that you have when you’re using Bitcoin, no one will know your name. No one will know your address or who you are and who you’re sending to.

When people look at the blockchain explorers, they can see the huge number of transactions that happen. They can go into each one if they have time and look at the amounts that were sent, the addresses that were sent from and to, or the timestamp of when it happened. And they can also see if this address was transacting to some other addresses or anything. But they cannot connect it to a particular person.

Chris:

Exactly. Unless you want them to. So, a simple content creator posts their Bitcoin address on their website. Well, they’ve created a link between themselves and the address ... they’ve done that voluntarily. But if the address were just on the blockchain, you’d know that that address was being reused, but wouldn’t necessarily know who that was. I just wanted to include that in the episode today.

Is there anything else you want to share with us in terms of on-chain metrics before we close out today?

Marija:

I suggest the viewers pay attention to how their tokens are performing regarding the on-chain metrics: the number of transactions, number of users, number of wallets, number of active monthly wallets and how those things are performing. I think that’s very important.

And of course, they can follow Weiss, which analyzes this data for them. As you said, I may notice some things like an outflow decrease or increase and am always digging for the reason because it can be completely stupid. For example, if you are looking at the inflows, and they are very large — say 500 million into an exchange. I would want to check if there were some Tether printed and sent to Binance or something like that to rig the metric. There are small bits and pieces like that which should be taken into account.

Chris:

That is a fantastic point. I’m going to build on that for a second because data in its naked form doesn’t have any meaning. It’s just numbers. You need a human being, like yourself, to look at that data, piece it together and figure out what it means. And that can only come from a human mind. The algorithms can crunch numbers, but they don’t know what they mean.

If you see, for example, tons of money flow into Binance for Tether, for example. Well, you can say, “Well, 500 million of Tether was just minted and sent straight there,” or, “Oh, maybe that’s probably Binance’s money,” but those conclusions can only be came to by an analyst with a thinking mind. So that was an absolutely excellent point there.

Marija:

Yeah. Also, we have a lot of analysts that are working on algorithms as well and aggregating data, which we think should be aggregated. And there are lots of things that help us out like that to create better ways analyze [the data].

Chris:

Absolutely. Great stuff. So, lots of great insights there, Marija. Thank you very much for being with us today. All the viewers and I thank you very much for being on today, and we look forward to your next appearance.

Other than that, that is all for this week’s Weiss Crypto Sunday Special. Keep your eye on your inboxes for next week’s episode. Until then, it’s me, Chris Coney, saying bye for now.