When newbie investors start their journey with Crypto trading, they get exposure to a list of various new terms and phrases. Among these, “trading volume” is one of the crucial terms for Crypto investors that plays a huge role in impacting the prices of any digital currency. In this article, we’ll learn about volume in Crypto trading, its importance, and some pros and cons.
Let’s get started!
What is Volume in Crypto?
Volume refers to the total number of times a Crypto is traded in a given period. This is usually represented in the form of volume bars or lines on a price chart that displays the total amount of Crypto traded on the market. In Crypto trading, there are various types of volume that are used by investors and traders, which are mentioned below:
- Trading volume:
It refers to the total amount of a particular coin traded on a Crypto exchange or trading platform. A coin’s trading volume is often measured across all active Crypto exchanges. However, traders can also limit the number to particular platforms. The trading platform is in charge of keeping track of transactions on an exchange, not the blockchain. Consequently, trading volume can also be known as “off-chain volume.”
- On-chain volume:
It refers to the total number of coins traded on a blockchain. This could include sending coins from one wallet to another, using Decentralized Applications (DApps), or transferring coins from an exchange to a third-party wallet.
- Exchange volume:
It refers to the total number of transactions that have happened on a particular Crypto exchange. This metric monitors trades of all digital currencies and can be used for centralized and decentralized exchanges.
- DApp volume:
DApp volume calculates the total assets traded within a particular decentralized finance application. In terms of volume, it is similar to exchange volume, given that Decentralized Exchanges (DEXs) are technically DApps.
Of all the types of volume, trading volume is the most favorite metric by Crypto investors and traders.
Since we know trading volume is the most common of all the types, let’s see why it is so.
Key features of trading volume
#1 It measures Crypto’s liquidity
The key feature that trading volume sheds light on is the total liquidity of a particular Crypto in the market. Liquidity is a measure that shows how effortlessly a Crypto can be exchanged at its current price.
In general, a steadily higher volume shows stable liquidity resulting in lower price fluctuations. As a result, high trading volume Cryptos are often traded more swiftly and frequently. Although, it’s important to remember that a higher volume isn’t always a positive sign; it can also be an indicator of panic selling.
#2 It determines market trends
The impact of trading volume is huge in the Crypto market as it helps in determining market trends. A strong trend can be indicated if there is price fluctuation of an asset accompanied by higher volume. On the other hand, when a price fluctuation results in low trading volume, it typically indicates a weak trend.
Additionally, trading volume can also reveal buyers’ interest level in a particular asset, which is typically high when trading volume is high and vice versa. Knowing market trends can be a great indicator to determine when it is best to invest or exit a trade.
#3 It is an indicator of Crypto trends reversal
In the Crypto market, trading volume can help you detect trend reversals. If there is a drop in the trading volume along with price movement in one direction, it might indicate a Crypto trend reversal. Low selling pressure and trading volume can signal a declining asset’s price. So, we can say that trading volume can assist you in identifying market trend reversals.
#4 It validates the Crypto market strength
Examining the trading volume is one of the best ways to validate Crypto market strength. This metric depicts the level of interest among buyers and sellers as well as the buying and selling pressure for a specific Crypto.
If there is a change in the trading volume that coincides with a corresponding price change, it can assist you in determining whether a trend is strong or weak. An upward movement with a high trading volume often indicates a strong trend. Therefore, keeping track of the trading volume can help you in determining the overall Crypto market strength.
#5 It allows you to measure accumulation in the market
Accumulation trends in the Crypto market are important indicators for analysis as they show when high-net-worth investors are purchasing the asset. Typically, a positive price action is inspired by the flow of funds from large wallets. Therefore, insights into accumulation can aid traders in selecting the best time to purchase Cryptos.
So, this was about the key features of the trading volume. Next, let’s have a look at the pros and cons of utilizing volume in various Crypto strategies.
Pros of volume-based Crypto strategies
The volume of a Crypto is a data point that investors can evaluate independently of its price movements. Technical analysis tools typically rely on historical performance to forecast future trends, making them lagging indicators. However, trading volume can be analyzed in real-time and does not require past price action. Therefore, investors find the volume to be a valuable differentiating factor.
Moreover, volume is a straightforward indicator to use. It is a numerical value that doesn’t need to be charted or visualized, making it very easy for investors to interpret. By visiting websites such as CoinMarketCap, investors can view constantly updating 24-hour volumes of all major digital currencies. Sorting by 24-hour volume can quickly show traders which assets are receiving the most investment.
Cons of volume-based Crypto strategies
To make an informed investment, it’s important to use multiple sources of information, not just one. Relying solely on volume as a trading signal can be a mistake for novice investors, as it’s not always a reliable data point. Wash trading is a process that can affect volume accuracy as a trading signal. In this process, an investor places both a buy and sell order for the same Crypto at the same price, which creates a false impression of high trading volume. Although the order fills immediately, no actual Crypto changes hands.
Wash trading is illegal in most traditional markets, but it frequently occurs on multiple Crypto exchanges due to a lack of regulation. The purpose of wash trading is to deceive the market into believing that an asset is gaining momentum due to a spike in volume. Additionally, it can make specific exchange platforms or Crypto projects appear more popular than they really are, misleading new customers into joining. Therefore, when analyzing a Crypto’s volume, it’s crucial to consider the possibility of wash trading.
Trading volume is an important metric for assessing the strength and potential of a particular Crypto. It can help you identify Crypto’s liquidity, market trends, trend reversal, market strength, and accumulation. With this useful information, you can make a better investment decision as a trader.
However, it’s crucial to understand that the Crypto market it highly volatile, and Crypto trading can be risky and, depending on a particular metric, could lead you to significant losses. To minimize such risks and losses, it’s better to consider various metrics for Crypto trading.