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“Smart money” refers to investments made by professionals and institutions, who are known to have a better understanding of financial markets than the average retail investor.

In the crypto space, users can view every transaction being made on the blockchain. There’s a lot of data to sift through, but theoretically, it’s possible to identify the trades being made by professional investors.

Crypto analytics companies such as Nansen, Chainalysis, and CryptoQuant are built to track on-chain data and identify investing opportunities.

“We scan close to one petabyte of data every single day,” says Nansen CEO Alex Svanevik. In the early days of crypto, data tracking was limited to chains such as Bitcoin and Ethereum.

However, as the space has grown, it has become necessary to expand horizons in search of smart money. “If you only follow one ecosystem, you might miss a lot of activity in the others. You can’t limit yourself to just one ecosystem.”

Chainalysis CEO Michael Gronager offers a similar view saying, “The number of transactions has been growing and will keep doing so. For Chainalysis, we have to track every single blockchain out there because it could be important for our customer.”

The search for smart money

Identifying trading opportunities requires tracking the right wallet addresses. This can be a challenge considering there are almost 70 million active wallets today, as per research by Blockchain.com.

“There’s a lot of noise on the blockchain,” says Svanevik. “With Nansen, we wanted to find a way to surface the signal.”

The company works to curate a set of addresses which are worth tracking when it comes to investing and trading. These tend to be wallets which have a proven track record in making profitable investments.

alex svanevik nansen
Alex Svanevik is the CEO and founder of Nansen / Image Credit: Screenshot of TIA Conference 2022

“There are two ways to think about smart money,” says Svanevik.

First, there are large funds and institutions which are known to dedicate significant time and money to investing. Then, there are individual traders — NFT flippers, yield farmers — who have proven successful with their own strategies.

Nansen identifies and tags different wallet addresses using a combination of algorithms and manual analysis.

There’s no silver bullet. You have to have research analysts who are monitoring what’s happening, and in some cases, that means reading about fundraising rounds and mapping the token distribution to lead investors. It’s a combination of man and machine.

– Alex Svanevik, CEO and founder of Nansen

By doing so, the company is able to provide trading signals, which can help investors navigate the crypto market.

How blockchain activity has evolved over the years

In previous bear markets, such as the one in 2018, falling crypto prices coincided with a fall in user activity. This crypto winter has proven to be different.

“Transaction volume hasn’t declined a lot,” explains Gronager. “The value of transactions, yes, but the number of transactions [hasn’t gone down].”

michael gronager chainalysis
Michael Gronager is the CEO and co-founder of Chainalysis / Image Credits: William Mebane for Bloomberg Businessweek

This is courtesy of the real use-cases which have emerged in the crypto space. Beyond speculative investments, users are now able to use crypto assets — such as NFTs and tokens — for gaming or to gain access to online communities.

“I don’t really see a bear market,” Gronager says, on the basis that interest in the space hasn’t died down despite what the crypto prices might suggest.

“Transaction activity for NFTs is very high,” Svanevik adds. “But it’s spread across more marketplaces and chains than a year ago.”

Apart from transaction volume, Svanevik believes that the emergence of stablecoins has been another major change. “We have more than US$100 billion worth of stablecoins now; just the injection of US dollars into the crypto economy is very significant.”

This has changed the way funds are raised on the blockchain. Back in 2017, projects were raising capital in Ethereum, which they had to sell off following the market crash. Today, stablecoins allow projects to raise and retain their funds on-chain, protected from market volatility.

The growing use of crypto analytics

Beyond tracking smart money, crypto analytics can also be used to trace and recover crypto stolen through hacks and scams.

To date, the biggest blockchain hack — targeting Axie Infinity’s Ronin Blockchain — resulted in over US$600 million being stolen. Since then, 10 percent of the funds have been recouped through collaboration between law enforcement agencies and industry players including Chainalysis.

ronin axie infinity hack
Axie Infinity’s Ronin blockchain was hacked in March 2022 / Image Credits: Ronin

Chainalysis trains algorithms to find patterns and identify wallets involved in illicit activities.

“We have a team of around 50 people transacting with dark net, terrorist cells, and [other such actors].” By building this dataset, the company is able to work with law enforcement and aid in resolving crypto-based financial crimes.

Gronager believes that this is a more feasible way to address such crimes than banning the protocols and apps being used by bad actors.

He makes reference to Tornado Cash, which was recently sanctioned by the US Treasury. The Treasury claimed that the protocol had been used by hackers to launder upwards of US$7 million in crypto.

Gronager comments on the aftermath saying, “There are hardly any funds moving through Tornado Cash anymore, but now there are copies of it. You cut the head of a dragon, and it grows three new ones. Was that really what you wanted to accomplish?”

He adds that the tools to identify and track such methods of money laundering are becoming increasingly sophisticated.

If Tornado Cash was allowed to continue operating, crypto analytics companies would’ve been able to better understand money laundering patterns. “[By not sanctioning Tornado Cash], it probably would’ve [enabled] more funds to be seized.”

Featured Image Credit: Token2049

Also Read: Nansen, Binance, Solana execs on building crypto firms that can survive bear and bull markets

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