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The Five Best On-Chain Indicators for the Active Trader

Exclusive Research

  • Funding rates and Open Interest provides insights into market sentiment and positioning.
  • Market Value to Realized Value (MVRV) provides a macro view of market tops and bottoms.
  • 90D Coins Days Destroyed captures behaviour by long-term holders.
  • Spent Output Profit Ratio (SOPR) quantifies the magnitude of realised gains/losses.
  • Long-Term Holder Supply to Issuance Ratio helps quantify relative accumulation/distribution to miner coin issuance.

Report

With over 750 On-Chain Metrics available on Glassnode, here are the five best On-Chain indicators, as determined by signal strength and popularity.

Derivatives trading, namely perpetual futures, is increasingly influencing bitcoin spot via a host of sophisticated trading strategies in the futures market, ranging from ‘cash and carry’ arbitrage to ordinary hedging. One way to gauge sentiment and overall positioning in the futures market is by using the funding rate. The funding rate is the cost of funding long positions in the market for bitcoin perpetual swaps. When the rate is positive, long positions pay short positions for leverage and vice versa. Glassdoor data above shows that funding rates peaked negative on 26 July, with a strong rally in BTC in the subsequent days in August. The takeaway is one could have compared funding rates relative to bitcoin price action and days in current market cycle to determine the likelihood of the current trend to continue. In this instance, funding rates were overly negative, as BTC was down 55% and in a ‘bear market’ for over 90 days from the April highs. The same pattern appeared in September when funding rates briefly turned negative before a 40% rally in BTC in October. Similarly, Open Interest captured the shift in sentiment from August to September.

Market value to realized value (MVRV) has historically been one of the most reliable on-chain indicators of bitcoin market tops and bottoms. MVRV is calculated by dividing bitcoin’s market capitalisation by its realised capitalisation (aggregate cost basis). That is, realised capitalisation is calculated by valuing each unit of bitcoin individually at the price that it was last transacted on-chain. The most important takeaway here is that the few times MVRV has dropped below one have historically been some of the best times to buy bitcoin.

The Coin-Days-Destroyed-90 metric (CDD-90) gives weight to coins, which have not been spent in a long time, in order to observe changes in long-term holder behaviour. This metric will peak when large volumes of old coins are spent, usually in bull markets, and decline during periods of accumulation. As such, CDD-90 currently trades at historically low levels of around 150,000 CDD. This level coincides with periods of large-scale accumulation, including both early bull markets and later-stage bear markets. Note that the 150,000 level has been breached 12 times over the past decade, with each instance being one of the best times to buy bitcoin.

The Spent Output Profit Ratio (SOPR) is a useful tool in all market conditions, as it captures the aggregate profit and loss realised on a particular day. SOPR values greater than 1 imply that coins moved that day are, on average, selling at a profit and vice versa for SOPR values less than 1. Historically, successive peaks of high SOPR (creating an indicator uptrend) suggest continual distribution, usually during a bullish price rally. As more coins are spent back into liquid circulation, the probability of a local or macro market top increases. Conversely, lower SOPR values indicate one, or both of the following scenarios: investors holding profitable coins have reduced their spending indicating a return of conviction and a belief that current prices are not expensive. In bull markets this can signal that a correction has exhausted sellers and that accumulation may be underway. Investors holding coins at a loss are spending their coins. When the proportion of realised losses exceeds realised profit, SOPR will fall below 1.0. This is generally indicative of panic selling, capitulation or bearish market conditions. To note, this was apparent during the months of June-July as SOPR went below 1 at YTD lows, which was another excellent time to buy bitcoin.

The Long-term Holder Supply to Issuance Ratio helps gauge the magnitude of accumulation by long-term holders relative to the current coin issuance to miners. The ratio compares the 30-day change in LTH supply (blue) to the 30-day change in circulating supply (orange). Whereas the ratio in pink captures the multiple of monthly coin issuance that is being accumulated or distributed by LTHs. Per Glassnode, the ratio shows heavy distribution by LTHs during February 2021, as the metric reached 26.4x the number of mined coins. More importantly, since July, LTH accumulation has hovered around 13-15x issuance, signaling the number of coins taken out of circulation are significantly more than are being newly minted by miners.

Conclusion
Since all transactions are publicly recorded on-chain, timely insights can be derived. As such, eliminate the noise and get ahead of the crowd by applying these five on-chain indicators in your next analysis.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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