Most crypto investors use the same indicators, fear and greed index, social sentiment, etc. But there is a much better metric that almost nobody talks about, on-chain velocity. (I use velocity and on-chain velocity interchangeably here, but keep in mind that velocity isn't specific to on-chain velocity)
On-chain velocity simply measures how fast cryptocurrency moves through the network. There is one key difference between on-chain velocity and other metrics: things like volume and price are reactive. They are affected by what happened in the past, which is why on-chain velocity is a superior indicator. Velocity is predictive, and it captures what is about to happen. For example, during the 2021 bull run, Bitcoin's velocity shot up to 40% above its historical average about 4 weeks before it crashed in May. The same thing happened in November 2021, November 2023, and again in March 2024. Incidentally, the Fear and Greed Index before Bitcoin's crash was 80: extreme greed. It goes to show that all metrics aren't entirely reliable.
A high on-chain velocity signals an upcoming shift. It either means investors are taking a lot of profits (velocity spikes during euphoria) or doing things like moving to cold storage (it also spikes during fear). On the other hand, low velocity can also be dangerous. It just means that nobody is moving which also signifies a big change.
Changes in velocity are also a great way to detect market shifts. First, if the velocity is rising and the price is rising it indicates a pullback in about 2-4 weeks (like with the Bitcoin example). If the velocity is falling but the price is rising it signals that money is accumulating and you should hold or sell. If velocity is rising but the price is falling it is usually because of panic selling. In this scenario, it can be helpful to buy the dip since the price often bounces back in a couple of weeks. However, this is of course risky. On-chain velocity isn't a perfect indicator and you should always look at other factors before making a decision. If the velocity is falling and the price is falling it means the market is dead and you should sell. If the velocity is stable and the price is rising it signifies a healthy rising market and you should hold.
But, take all of this with a grain of salt. No one metric is perfect and you should always look at all the stats. For example, transactions could be moving off-chain, meaning that the on-chain velocity might look low when the real activity is happening on Layer 2s or exchanges. So, always reference exchange flow too.
TL;DR: Watching on-chain velocity is a good way to read the market, but always be smart about it.
