In previous articles on cryptocurrency training We show you 3 onchain metrics with which you can analyze the on-chain data of certain block chains. These metrics can give us a real advantage in the market. And since this article was weeks ago, today we bring you volume 2 of this series of training analysis metrics in cryptocurrencies.
Metric #1: Coin Days Destroyed (CDD)
What is CDD?
Coin Days Destroyed is the first metric of this cryptocurrency formation. We measure the economic activity that gives more weight to coins that have not been spent for a long time in the Bitcoin network. This metric is an alternative to looking at total transaction volume, as it may not accurately represent the economic activity of wallets that hold their tokens longer. Therefore, wallets that hold their funds for the long term are important since when they spend their tokens they can indicate a notable change in long-term sentiment.
How is CDD measured?
Each day that a token unit remains unspent, it accumulates one “currency day.” When spent, the accumulated currency days are “destroyed” and recorded in the CDD metric. The total number of currency days destroyed (value of the CDD indicator) in a certain period of time helps us identify significant movements in the portfolios that have held tokens for a longer time. The metric value on the tokens is measured from the UTXO, multiplying its value by the number of days that the inactive token accumulates. For example, if a UTXO worth 0,5 BTC has remained idle for 50 days in a wallet, it has accumulated 25 days of currency.
Transactions with the UTXO model. Source: Draveness.
How do we interpret the CDD?
In order to interpret the first metric of this cryptocurrency formation, there are some factors to take into account:
- When CDD rises, it may indicate that long-term investors are spending coins to liquidate their tokens in profits, taking advantage of market strength. These signals are common in uptrends, as long-term investors sell and often mark the highs of that trend. This can turn dormant coins into liquid supply in circulation if the coins are sold.
Coin Days Destroyed (CDD) metric history. Source: Blockchair.
On the other hand, when the CDD falls it may indicate that the older currencies remain inactive, therefore the conviction to keep them in the portfolio is high. These signals are common in uptrends during price corrections, which usually mark the beginnings of an upward movement. When we see low values of this metric, it means that holders are holding their tokens again instead of selling them.
Metric #2: Liveliness.
What is liveliness?
The second metric of this cryptocurrency training is liveness. Liveness is a metric that provides us with information about changes in holder behavior. It helps us identify long-term investors' accumulation trends and their spending. It helps us identify periods in which the CDD grows at a faster rate than the network accumulates them.
How is liveliness measured?
Liveness is calculated by taking the ratio of the accumulated currency days destroyed to the cumulative sum of all currency days accumulated by the network. Growth in liveness and upward trends can suggest to us that there is growth in commercial activity or that dormant coins with a long shelf life are being sold, increasing the circulating supply. These movements are associated with long-lived portfolios that reap profits.
Bitcoin liveness chart. Source: Glassnode.
Conversely, decreasing liveliness and downward trends may suggest a decline in trading activity or that currencies are holding up, causing circulating supply to fall. These movements are associated with long-lived portfolios that prepare for a period of accumulation.
How do we interpret liveliness?
The liveliness allows us to identify market cycles through its movements. For example, liveness grows (red shading) when holders spend their tokens to close profits, which destroys the accumulated coin days of those tokens. On the other hand, liveness decreases (green shading) when holders accumulate new tokens, which ends up increasing the network's inactivity and, consequently, increasing the accumulated coin days again. It also helps us determine moments of balance between currency days destroyed and days accumulated (blue shading).
Legend to interpret liveliness market cycles. Source: Glassnode.
Metric #3: Network Value to Transaction (NVT)
What is NVT?
The Value Network to Transaction (value of network to transaction translated into Spanish) is the last metric of this formation in cryptocurrencies. This metric describes the relationship between Bitcoin's market capitalization and the network's transfer volume. This metric is considered in onchain analysis what is known in stock analysis as the ratio between price and earnings (P/E). Therefore, this metric will allow us to see the imbalances that occur between the value of the network and its volume of transfers.
How is NVT measured?
NVT is measured by dividing the network value (market capitalization) by the dollar volume transmitted through the network daily. Therefore, when Bitcoin's NVT is high, it tells us that the network's valuation is exceeding the value transmitted in transactions. On the other hand, when the NVT is low, it tells us that the valuation of the network decreases compared to the value transmitted in the transactions.
Bitcoin NVT Ratio. Source: CryptoQuant.
How do we interpret the NVT?
The NVT is of great help to us to detect moments when a trend may be losing its strength or recovering. Since its calculation is based on measuring the value of the network over the volume of transactions, when NVT rises it is due to growth stages or possible speculative bubbles. On the other hand, when the NVT falls it is due to bearish movements on the asset. Therefore, the NVT serves as an indicator to detect the moments in which speculative bubbles form and the beginnings of bearish movements. In the following graph from the creator himself, Willy Woo, we can see the NVT against the price of BTC, with two lines that determine the buy/sell zones indicated by the NVT.
Bitcoin NVT ratio chart. Source: WooBull.com.
How can we use these metrics to improve our cryptocurrency training?
After reviewing these three metrics that continue the previous series of this training in cryptocurrencies, we have discovered the help it gives us to be able to detect movements that we cannot see with the naked eye on a graph. That is the magic that onchain metrics contain, the data that can end up saving us from headaches...