On-chain trading strategies are real despite their low popularity and questionable usefulness
On-chain analysis is a relatively new way to predict movements and trends in cryptocurrency market this is why its tools have not been as widely adopted by traders and investors compared to technical indicators.
As suggested by the backtesting of the sophisticated trading strategy based on the PnL Index derived from the PCA of MVRV, NUPL and LTH SOPR indicators, the usage of the aforementioned indicators while trading BTC would have been 142x more profitable than regular holdings.
The strategy uses tools that primarily determine the nature of spending on the wallets of traders and investors. It also determines when the market is overbought and oversold, which can be used to form actual entry or exit signals for those using the strategy.
As highlighted by the analyst, the main problem is that traders are not patient enough to keep their positions open for more than six months until the cycle changes since on-chain analysis is mostly a long-term forecasting tool.
The String Data Problem
The main problem with using on-chain data and implementing it into your trading style is subjectivity and the lack of real testing. Back when Bitcoin was on the ATH, on-chain indicators and people using them predicted the continuation of the trend and broke new highs like $100,000 and even $300,000.
The cryptocurrency community has also expressed its concerns about the usefulness of the on-chain tools that remain underdeveloped and untested. Users also reminded the analyst that he himself predicted a bottom for Bitcoin since the first cryptocurrency reached $50,000, which makes the effectiveness of the tools he promotes questionable.
At press time, Bitcoin is trading at around $20,000 after briefly dipping below $18,000 yesterday.
