In the world of crypto, there are all kinds of valuable metrics you can use to analyze price action. However, looking at these different metrics can be overwhelming, especially when new to the crypto scene.
One extremely useful metric to analyze Bitcoin is the daily active addresses (DAA).
A Bitcoin address serves as a unique identifier of your wallet, and you can use it to make Bitcoin transactions. Bitcoin active addresses are a bit different. This guide will go over what Bitcoin daily active addresses are, how they work, and more.
What are Bitcoin Daily Active Addresses?
When you set up a Bitcoin wallet (or a wallet for other cryptocurrencies), your wallet gets a unique address assignment.
This address is vital to ensure the sender sends their cryptocurrency to the intended recipient. A typical crypto wallet address contains a combination of alphanumeric characters – in other words, a combination of words and letters. Usually, the address is between 26 and 35 characters long, and it can be represented by a QR code.
This string of characters comes from a hashed version of the wallet's public key and a checksum to avoid any typos. A checksum is a mathematical value assigned to a file sent through a network (in this case, the Bitcoin blockchain). The value verifies that the data contained in the file remains unchanged. Essentially, it's a method for error-checking data.
Digital wallets make it easy to copy and paste your address to ensure accuracy. For example, you can quickly and easily scan a QR code or use the corresponding address to send and receive crypto over the blockchain.
In short, the active address allows you to send or receive transactions within a set time period. Successful transactions are visible on the blockchain, which works as a public distributed ledger. You can observe and analyze other investors' activities on the ledger to better understand what's going on daily in the crypto world.
An address becomes active as soon as it's been a part of a successful transaction – either as a sender or receiver. Because of this, active addresses help indicate daily users' activity on the blockchain.
In other words, they represent the total number of active users on any given day on the network. So if you hear the term monthly active users, that's referring to the total number of users that either send or receive crypto in a specific month.
However, it's important to note that a specific address is counted just once in a particular timeframe. So, if you're counting the number of daily active addresses but someone makes two transactions in one day, the address will only be counted once.
Another essential point to note with active addresses is that they must be a part of an on-chain transaction. This is because on-chain transactions are considered successful once they've been recorded and confirmed on the blockchain.
On-chain transactions are permanently recorded on blockchain networks, including private blockchains, public blockchains, hybrid blockchains, and consortium blockchains.
On the other hand, wallets with off-chain transactions are not counted as active addresses, as they are not recorded on the blockchain like on-chain transactions. Instead, off-chain transactions use traditional peer-to-peer transfer methods, including exchanging private keys linked to a new wallet.
How are Daily Active Addresses Related to Price?
So, how do price and daily active addresses correlate? Generally, a price drop will also lead to a decline in daily active addresses.
When crypto prices start to drop, investors will attempt to leave the market. However, active addresses can sometimes go up, as those who bought their Bitcoin at a low price will want to preserve any profits before the price falls even lower. In other words, they'll sell their Bitcoin and convert it to fiat currency.
Additionally, some people will exit the crypto market to avoid succumbing to losses during a market meltdown. Investing can be a rollercoaster of emotions, and often people will sell coins during these fluctuations because they can't handle this emotional rollercoaster.
When investors dump coins based on their feelings, it leads to fewer active addresses. For example, when China cracked down on Bitcoin in the summer of 2021, the number of daily active users dropped by nearly 60%, from 1.3 million to about half a million.
Exploring the DAA Data
Data from daily active addresses can be used in many ways. For example, their number can indicate how healthy the Bitcoin network is. The metric shows you how the network grows over time. It helps you tell how many people are utilizing the blockchain and whether a blockchain project is attracting new investors.
Active addresses also follow the rules of supply and demand. If the demand for a product goes up while the supply remains the same, the price will increase. Similarly, if a network sees an increase in daily active addresses, the cost of the particular coin will also likely go up.
For blockchain projects like Ethereum that have an unlimited supply, a high number of active addresses is crucial. If a network like Ethereum sees a lot of transit, that’s a good sign of scalability.
In this case, the crypto gains value because of its utility instead of its scarcity (as with Bitcoin). Therefore, active addresses give you the trust to invest in the project.
Building DAA Data into your Investment Strategy
While you shouldn’t solely rely on DAA data for your investment strategy, it is an important factor to consider.
If you’re thinking of investing in a new crypto project, paying attention to the DAA can tell you how much traction the project is gaining and how much trust others have in it.
In terms of Bitcoin, the DAA data can help let you know when it may be a good time to buy or sell. For example, if you notice fewer daily active addresses, that may indicate you should sell, particularly if the price looks to be turning lower at the same time. However, if you’re using Bitcoin as a long-term investment strategy, DAA data shouldn’t be your sole reason for buying or selling.
As we mentioned earlier, emotions can play into investing. If you wait out the price drops, you may see bigger returns in the future.
Paying attention to daily active addresses is an important component of Bitcoin investing. It can also help you learn about the popularity and trust around new projects.
However, it shouldn’t be your only guiding factor in investing. To learn more about investing in Bitcoin and other crypto assets, Sign up for SMART VALOR.