Bitcoin On-Chain Trading Signals

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Contributor, Benzinga
Updated: August 9, 2022

By market capitalization, Bitcoin is the most valuable cryptocurrency and is frequently referred to as the flagship coin of the industry. Because of this, all other cryptocurrencies are referred to as altcoins. Bitcoin is a type of virtual money that is used as a speculative store of value. Since there is no centralized authority in charge of it, it is decentralized. Instead, Bitcoin is run by thousands of computers distributed around the world. Bitcoin, like the vast majority of cryptocurrencies available on the market today, uses public blockchain to verify and record data and transactions. As a result, the data is accessible on-chain to anyone, anywhere in the world, at any time.  Trading it can be difficult due to its seemingly random volatility but Bitcoin trading signals can be helpful when trying to predict its price in the future.

On-chain analysis involves examining information and trading signals mostly derived from a blockchain ledger to determine market sentiment and predict future price movements. More specifically, on-chain analysis looks at crypto wallet balances and transaction data. Alternatively, on-chain Bitcoin trading signals are triggers to buy or sell Bitcoin based on a predetermined set of blockchain indicators. For example, the Puell Multiple – a metric that looks at Bitcoin miners and their revenue – typically flashes a buy zone when its value is below 0.5 and vice versa when it is above 3.50. No trading signal or indicator is perfect, however, and they shouldn't be used like magic eight balls.

You can use many different useful on-chain Bitcoin trading signals, many of which can be seen below:

Bitcoin On-Chain Analysis

Holders Making Money at Current Prices

Interestingly, about half of all Bitcoin holders have unrealized profits on their Bitcoin holdings. This factor suggests a few things. It may hint at the fact that many of the paper hands investors who bought near the local top in November have exited the market. It also highlights the exponential growth of Bitcoin from cycle to cycle, meaning that investors who started investing in Bitcoin prior to 2018 are sitting comfortably despite the recent market downturn.

Holder’s Composition by Time Held

The majority of Bitcoin holders have been holding Bitcoin for over a year, with only a small fraction having held Bitcoin for less than a month. The high proportion of one-year holders suggests that many investors have a strong conviction in the long-term potential of Bitcoin and refuse to sell for short-term gains. 

Concentration by Large Holders

Overall, a 10% concentration by large holders of BTC suggests that Bitcoin holdings are evenly distributed among its holders. Over the last few years there has been a continuous dispersion of the Bitcoin supply, largely because of an increase in the number of small holders. As the cryptocurrency market continues to develop and become more mainstream, it is likely that the concentration by large holders will decrease over time. 

Exchange Inflows and Outflows

Exchange outflow refers to the total amount of BTC transferred from the exchange, and exchange inflow refers to the total amount of BTC transferred to the exchange. Generally speaking, an increase of inflow to exchanges is a bearish sign and an increase of outflow from exchanges is mostly a bullish sign. Substantial inflows to an exchange may suggest that many investors want to sell their BTC holdings. Alternatively, substantial outflows from exchanges suggest that many investors want to move their BTC to long-term, cold-storage holdings. 

Is Now a Good Time to Buy Bitcoin?

Since reaching a record high of $69,000 in November 2021, the price of Bitcoin has been declining, which has led many individual investors to sell their holdings. Additionally, over the past several months, unfavorable incidents like the Terra Ecosystem failure and the Celsius scandal have roiled the cryptocurrency market, ultimately worsening Bitcoin's and the industry's gloomy trend. It was the first time in history when Bitcoin traded below the all-time high of the prior cycle when it fell to $18,000 in June 2022.

However, while some see a hopeless and depressing market, others see a fantastic opportunity. In retrospect, periods of unheard-of fear and pessimism frequently prove to be exceptional opportunities to acquire a valuable item at reasonable costs. A $20,000 Bitcoin is undoubtedly more appealing to buy than a $70,000 Bitcoin. So, if you think Bitcoin has long-term potential, now can be a great time to start entering the market, even though there are risks involved. 

How to Buy Bitcoin (BTC)

BTC can be traded on major exchanges such as Crypto.com, Robinhood Markets Inc. (NASDAQ: HOOD) and eToro. Many of these platforms allow you to purchase Bitcoin using your credit card, through swapping features or through different trading pairs such as BTC/USDT. 

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How Does Bitcoin Fit in the Bigger Picture?

Bitcoin is a Layer 1 blockchain, a type of project that represents the base network or underlying infrastructure in a blockchain-based financial system. It is a new, fair and transparent currency for a divided world and serves primarily as a decentralized store of value and a safeguard against inflation. It is not intended to be used to purchase coffee; rather, it is intended to become the next major reserve currency.

Bitcoin is generally referred to as a first-generation blockchain. It wasn’t designed as an overly complex system, which is a strength in terms of security. In contrast, Ethereum is known as the first second-generation blockchain. In addition to financial transactions, second-generation blockchains allow a greater degree of programmability. Ethereum is a decentralized computing platform. The main idea behind Ethereum is that developers can create and launch code that runs across a decentralized network instead of a centralized server (using smart contracts). This aspect means that these decentralized applications (dApps) cannot be censored or shut down. Both Ethereum and Bitcoin validate transactions through the Proof-of-Work consensus mechanism right now but Ethereum is moving to the much more environmentally friendly Proof-of-Stake system soon. This new narrative may help Ethereum against Bitcoin in the future.

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