Technical Analysis Is Dead, Long Live Transaction Analysis

Technical analysis was controversial before crypto trading existed.

For the uninitiated: technical analysis, or TA, tries to predict future price movements based on historical price movements. This is done generally by looking for repeatable patterns in price data.

Miguel Morel is founder and CEO of Arkham Intelligence, a blockchain analytics company. This opinion is part of CoinDesk's "Trading Week."

TA bulls believe these chart patterns can be self-fulfilling, given the price reflexivity of traders placing bets based on the same data and analyses. Skeptics say that these patterns are a bunch of nonsense, that TA is astrology for men.

During the 2021 crypto bull run there was a technical analysis craze. Crypto trading circles were full of price charts with lines scrawled over them tracking Fibonacci retracement resistance levels, flags, pennants, cups, triangles and other augurious shapes.

Is technical analysis BS? Not entirely. Of course past price action tells you something about future price action. This is true anywhere: knowling something’s history helps you better predict its future.

But exactly what TA tells you isn’t easy to figure out. And nobody seems to know for sure whether its various geometric predictors can guarantee anything.

More from Trading Week: Black Thursdays: Bitcoin's 5 Worst Crashes | Opinion

Crypto traders have been forced to rely on technical analysis because they don’t have much else to go on – like cash flows, which are used to model stocks. Plus, price data is easily accessible in crypto (that’s the point of a blockchain). But next-generation crypto analytics tools are leading to the rise of a new TA: transaction analysis.

Smarter analysis

In traditional finance transaction data is guarded by exchanges, brokers, banks and regulators. It’s not accessible to everyone and big players pay a fortune for it. In crypto, transaction data is public and on-chain – but it’s not usable by everyone.

Manually making sense of raw blockchain data is practically impossible. The data needs to be processed and analyzed to be made useful. That’s what sophisticated blockchain analytics tools are doing.

The combination of on-chain data and transaction analysis is something that hasn’t been before – in crypto or traditional finance. Getting access to transaction data and tools for searching and analyzing it will unlock a goldmine of potential insight.

People who have been on the inside of projects and see how the sausage is made know that the explanations for price movements are often simple and based on key players buying and selling. When the biggest holders are dumping the price is likely to go down. When a major new buyer takes a position prices are likely to go up.

That’s insight traditional TA cannot provide, because it’s limited to looking at price movements. Transaction data, instead, is the underlying activity that generates prices in crypto.

More from Trading Week: Why Trading Is Essential for Crypto | Opinion

A concrete example: Tesla’s announcement of their purchase of $1.5 billion in BTC caused an immediate 10% jump in the price. Those transactions took place before the announcement and could have been traded on.

Tracking buying and selling by the market’s players is the simplest application of transaction analysis but there are many others. Flows to and from exchanges, institutional positions, historical performance, market maker activity and so on can be used to put together a model of the market that drives trading decisions.

For example, in the days before Celsius froze withdrawals the company deployed hundreds of millions of dollars to its decentralized finance (DeFi) positions in order to prevent liquidation. These deployments were visible on-chain and indicated that Celsius was in a distressed position. That could have been traded on.