In this episode of the Crypto Trader podcast, Jacob Canfield sits down with David Puell, head of research and co-founder of Adaptive Capital, a new cryptocurrency hedge fund focusing on the emerging field of on-chain analytics. They discussed the technicalities of on-chain analytics and various charts related to the topic.
Topic #1 What is On-Chain Analytics
David explains the meaning of on-chain analytics. What it is, as applied to bitcoin, tries to extract several factors or data series from the accounting system that bitcoin is based on, that is the UTXO system. Based on the obtained data series, one could track several things, such as transaction volume. He also touched briefly on the beginnings of on-chain analytics. On-chain analytics pioneer Willy Woo theorized that you could correlate many things through blockchain. He noticed that whenever there is low transaction volume with respect to market cap, it is an indicator for a further downslide.
Topic #2 UTXO and Blockchain Heuristics
David also explains UTXO. It is the accounting system that Satoshi developed for bitcoin. On the public ledger, it provides a way to read and know how much bitcoin has been transacted from one address to another. Based on the information contained in the UTXO, you can get data like transaction volume. Present blockchain analytics have specific heuristics and estimates that filter out skewed data. Whatever the heuristics filter out as a genuine transaction of value in the blockchain will get presented in the other indicators.
Topic #3 The Influence of Confluence
Don’t just use one model. The duo outlines the importance of something called “confluence.” As a trader or investor, when you have historical accuracy provided by the NVRV, the delta cap, the 200-day moving average, and all these different things, then your trade can be deemed as safer. One model saying something is good, but when 8 to 9 models are all saying nearly the same thing, then chances are it will happen. Cross-checking and referencing with other models provide a statistically higher accuracy rate, leading to better decision making. Especially in such a volatile asset class, it’s easier to hold assets when you know that your investments are already 300% up. Proper risk management goes a long way.
Topic #4 Other Analytics Besides On-Chain
Analytics utilizes specific metrics to know when to exit the market, or at least hedge future contracts. The duo discusses that aside from on-chain, there are other publicly available analytics out there to use as well. One such example is the Mayer Multiple, which says how far away price moves from the 200-day moving average. It gives the trader a metric on how far price moves away from that standard. The 200-day moving average is used because algorithms primarily drive markets and 200 days is the market benchmark and is especially useful when used for bitcoin trading.
Topic #5 Adaptive Capital Funding Rates
The market is shifting a little bit in its dynamics. Traders are moving towards more speculative from long-term, and from low-frequency to high-frequency trades. David and Adaptive Capital use that information in their funding rates. Their basis for the long-term is centered around on-chain analytics, and they also delve around order book analysis and market sentiment indicators. Seemingly unrelated factors are combined to produce funding rates for their company and traders.
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