[REPORT PREVIEW] The Chainalysis Token Health Report: Using On-Chain Data to Assess Crypto Assets for Opportunity and Risk

This blog is an excerpt from our Token Health Report. Sign up here to download the whole thing!

Many investors are eager to embrace cryptocurrency, but don’t feel they have the data to do so safely. With traditional assets, there are established providers for a variety of metrics that investors can use to assess opportunity and risk: market data for trading activity and pricing, fundamental data for business and industry analysis, reference data for comparing assets and transactions in a standardized way, and more. Does a nascent asset class like cryptocurrency have comparable data available so that investors can make decisions with confidence as they do when evaluating stocks and bonds?

The answer is yes, and then some. Investors not only have crypto equivalents to the much of the data they’re used to, but also have another form of data not available in other asset classes: a secret weapon known as on-chain data.

Virtually all cryptocurrencies operate on transparent, decentralized ledgers known as blockchains, and those blockchains record every single transaction carried out using that cryptocurrency, as well as the exact balances and aggregated activity of all participants. Investors can use that on-chain data to get unique insights into crypto assets that aren’t feasible with traditional assets.

Of course, investors need the right tools to draw actionable insights from on-chain data, as it’s not coherent by default. Raw on-chain data would simply show you a list of transactions between different crypto addresses, with no indication of what organizations and entities those addresses represent. Chainalysis solves this problem by grouping addresses into wallets, meaning collections of addresses controlled by a single, distinct entity through a single endpoint. We then label those wallets according to the service that controls them (e.g. an exchange like Coinbase or darknet market like Hydra). Insights on personal wallets are also available. The result is that our data can show transaction trends across market segments and participants for virtually any given crypto asset, allowing investors to spot opportunities and risks in the market.

In this report, we share examples of how on-chain data can help investors analyze individual crypto assets across three important dimensions:

  1. Distribution. How widely distributed is this cryptocurrency? Are the tokens spread across many users or concentrated within a small group?
  2. Liquidity. How active is the market for this cryptocurrency? How frequently and at what volumes is it traded within a given time period?
  3. Market composition. What segments of the crypto economy are holding and using this cryptocurrency? Do they skew toward being illicit or risky?

For each dimension, we’ll provide specific on-chain metrics investors can use to assess a given cryptocurrency, using four tokens as our examples: Bitcoin, Ether, USDC, and FTX’s FTT token.