Limitations of On-Chain Metrics

Cole Torres
Feb 19, 2024
Laptop screens showing on-chain metrics
Photo by Nataliya Vaitkevich on Pexels

Despite the benefits of data-driven insights derived from on-chain metrics to one's investment decisions, on-chain metrics have some drawbacks and limitations. Some of them are discussed below.

There are differences in analyses since not all blockchains are equally created.

For instance, Ethereum's blockchain is utilized for a wide range of activities, including the provision of applications known as smart contracts, whereas Bitcoin is focused on being a form of digital gold. Due to the differences between the blockchains, it might be difficult to perform a fair analysis on both cryptocurrencies because varying results can be drawn from a given metric. Hence, when analyzing certain blockchain on-chain metrics, the differences among blockchains should be taken into account.

Bitcoin has more than a decade of data to support historical analysis compared to other newer cryptocurrencies, which have relatively less data.

More recent altcoins have relatively less historical information, thus comparing such data with older blockchains may be less accurate and have greater disparities. Having data that goes way back is preferred when it comes to analyzing on-chain metrics since it provides us more proof to study and refer to. The more data available, the more market information and trends are captured, since there is sufficient information that can be used to get insights from.

On-chain analysis may not be appropriate for short-term investors and traders since the indicators typically give actionable signals for longer-term market cycles.

Generally, on-chain metrics showcase a big picture of the market trends. Though there are aggregated daily values for the metrics, it may not be efficient to supplement investing/trading in the short-term.

On-chain metrics may not be easily accessible.

On-chain metrics sites like Glassnode and IntoTheBlock offer contextualized and actionable market insights, reports, and analyses based on on-chain metrics. However, not all metrics can be accessed due to subscriptions.

On-chain metrics should not be solely relied upon as a signal to buy or sell.

Though on-chain metrics generally provide insights about trends and patterns of a blockchain, they should not be looked upon as a "Holy Grail" of buying or selling. Metrics capture the current state of a blockchain. It further supports investment/trading decisions, but it does not necessarily signal whether to buy or sell as well. 

Being aware of on-chain metrics' limitations mitigates ineffective insights when analyzing the metrics. Though on-chain analysis offers huge value add to making investment decisions, the technology is still in its early stages. Consequently, the application of the metrics may change over time as new trends are identified and taken into account as the crypto space develops.

Cole Torres
Data Scientist, Cryptocurrency & NFT investor

A data scientist who has keen interest in cryptocurrency analytics, and product analytics. Outside the office, a fitness enthusiast, and a tech junkie. Experienced investor in the Philippine Stock Exchange and Cryptocurrency.

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