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Crypto Newsletter May 2023: On-chain Analysis

16 May 2023

 

Crypto Whale Hunting


glassnode_btc_supply_distr.png

Source: https://insights.glassnode.com/bitcoin-supply-distribution-revisited/. Past performance is no guarantee of future results

One of the key activities of an on-chain analyst is to keep track of those with large holdings, also known as whales. The full spectrum of sea creatures can be found in the definition of this on-chain metric. Unlike traditional finance, public ledgers such as Bitcoin and Ethereum are fully transparent in terms of how many coins rely on a specific address, how much value is transacted and what fee was paid to the validator. This information helps on-chain analysts to better understand the dynamics of the market at grand scale. What does the composition tell us exactly? As years have passed by, the number of shrimps, crabs and octopus have significantly increased their share of the Bitcoin distribution. This is a good sign of decentralization of wealth and increases the security as a universal monetary system. Arguably, there is still a long way to go if you consider the median amount of cash an adult holds (e.g. Americans under 35 is just $3,240, according to MarketWatch). We expect the number of addresses with less than 1 BTC (shrimps) to continue to increase as time goes by.

Definition:

Account Sizes:

Shrimps (<1 BTC)

Crab (1-10 BTC)

Octopus (10-50 BTC)

Fish (50-100 BTC)

Dolphin (100-500 BTC)

Shark (500-1,000 BTC)

Whale (1,000-5,000 BTC)

Humpback (>5,000 BTC)


Ethereum versus Bitcoin Adoption: Active Address Perspective

number-of-active-addresses-7dma.png
Source: https://www.theblock.co/data/on-chain-metrics/comparison-bitcoin-ethereum. Past performance is no guarantee of future results

The number of unique addresses that were active in the network either as a sender or receiver. Only addresses that were active in successful transactions are counted. Chart uses 7-day moving average.

number-of-new-addresses-7dma.png

Source: https://www.theblock.co/data/on-chain-metrics/comparison-bitcoin-ethereum. Past performance is no guarantee of future results

The number of active addresses is one of the many possible adoption metrics available to an on-chain analyst. It provides an intuitive and simple method of comparing the adoption across multiple blockchains. For example, the ratio of the Bitcoin/Ethereum marketcap is approximately 2.36 (May 2023) while the active address ratio is closer to 2. This metric suggests that based on active addresses alone, Ethereum (ETH) is undervalued compared to Bitcoin (BTC). However, the number of new addresses paints an opposite picture.

Alternatively, one could observe that Ethereum has more active addresses per new address created. This could be explained by their core values, Bitcoin is usually described as a store of value (i.e. it does not need to be active) while Ethereum is usually described as a smart contract platform where ETH is constantly on the move.

The big question is of course whether this is a lagging indicator or a leading indicator when it comes to historical performance, not just in terms of price performance but also other performance metrics such as trading volume or number of transactions processed by the network. I will leave this as an exercise to the reader. Keep in mind: historical performance is not an indicator for future results.

The number of unique addresses that appeared for the first time in a transaction of the native coin in the network.

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