20 December 2022 • 7 min read
Volume in crypto is the relative sound level of your voice as it gets louder and louder each time you check your portfolio. The lower your portfolio’s value, the higher the volume of your voice, unless you’ve been talking about crypto in public lately, in which case the volume resembles more a whisper.
All joking aside, the amount of an asset traded within a period of time is known as volume (i.e., trading volume). And this parameter is common to all markets—stocks, futures, options, and cryptocurrency.
A market’s health is determined by the degree to which the demand matches supply. In other words, buyers' willingness should match sellers' willingness. Once demand matches supply in (near) equal proportions, the asset would trade in high amounts. However, if there is a discordance between demand and supply, the asset would trade in low amounts.As you might have guessed, supply and demand is one of the most important factors in determining how a cryptocurrency gains value.
Generally, the trading volume of a crypto asset is the total number of units of the asset traded on all exchanges (centralized and decentralized) within a particular time period. However, an exchange will typically display only the volume traded on it. Trading volume can be measured in US Dollars or in the units of the asset.
For instance, as of writing, BNB had a 24-hour trading volume of $50.74m or 174,328.08 BNB on Binance. (A simple check to ascertain if there’s a correlation between the two figures would be to multiply the number of units traded by the market price. So multiplying 174,328.08 by $290.7, which was the market price of BNB as of writing, would yield approximately $50.74m.)
Trading volume is an important metric in the crypto market because it underpins various technical indicators such as liquidity, market trends, market strength, accumulation, and market reversal.
Trading volume determines an asset’s liquidity. In other words, it indicates how easy and quick it is to buy or sell the asset at its current market value. High volume and liquidity stabilize an asset’s price and reduce frequent price fluctuations.
(As an aside, it’s important not to confuse liquidity with liquidation in crypto trading!)
Furthermore, trading volume is a vital metric for understanding market trends. A price move accompanied by a high volume suggests the beginning of a strong trend. On the other hand, if low trading volume follows the price move, then it suggests that the trend is weak. Also, a high volume accompanying an uptrend indicates high buyer interest and a willingness to push the asset’s price higher. But if a high volume accompanies a downtrend, then there is increasing selling pressure and low buyer interest. This relationship between trading volume and trend gives traders an insight into the optimum entry and exit points for a trade.
Trading volume validates market moves. If an increased volume accompanies a price change in either direction, the price change is likely strong. However, if the change is accompanied by a low volume, then the change is likely weak and might see a correction.
Trading volume gives traders an easy way to spot accumulation in the market. If there is a spike in volume but no significant price movement, this likely indicates accumulation. It means that investors, especially high net-worth investors, are gradually buying assets in large amounts. Consequently, a price surge after the accumulation phase is expected.
A decline in trading volume despite a price movement in a direction might suggest a reversal or a price correction. A price surge or a higher high accompanied by a low volume might be a sign of decreasing buying pressure and a subsequent price drop. Conversely, a decrease in price or a lower low accompanied by a low volume signifies a decline in selling pressure and a subsequent price surge.
Note, however, that investors should not use trading volume as a sole predictor of market reversal. It is important to confirm reversals through other technical indicators.
Based on the aforementioned summary, we see that high volume often means high buyer interest and a potential price increase. To put it another way, in a high-volume market, an asset often quickly and easily changes hands.
However, volume can and does go both ways. A high trading volume is fairly indicative of the start or the peak of a bear market, when there’s a high selling pressure as traders anticipate a price drop. Just as in market reversals, volume should not be used as the sole predictor of market trends.
Contrary to high volume, a market with low volume signifies a declining buyer interest, making it difficult to exchange an asset under such conditions. Low volume indicates low liquidity and falling prices.
Low-volume assets often have a low supply and are highly volatile because their prices can be easily manipulated. For example, a buyer can purchase a low-volume asset at a higher price in an attempt to drive the price upwards and create a false uptrend and then dump it on naive investors.
Low-volume markets are also unprofitable for sellers since low demand causes them to drop their asking price lower than their buy price.
Crypto charts usually display the volume of an asset trading within a particular time frame. In order to see this information, simply click on the preferred timeframe.
You should bear in mind that candlesticks indicate the volume at which a particular crypto is being traded. The longer the stick, the higher the volume. A green candlestick shows buying interest, while a red candlestick shows selling pressure. Admittedly, reading crypto charts can be quite difficult for newer traders or those without a background in finance, which is one of the reasons why we’ve prepared a handy article about how to read charts like a pro, where you can learn all about candlesticks, chart patterns, plotting, volume, and technical indicators.
Let’s consider an analogy to illustrate the point.
A person is given 100,000 liters of water to distribute to a community. Now, in order to do so, they require smaller barrels in various capacities such as 100 liters, 200 liters, 500 liters, and 1000 liters. The larger the number of people that require water per time, the larger the barrel the distributor uses. The person would keep channeling water from the 100,000-liter barrel into the smaller barrels until distribution is complete.
In this analogy, the salient point concerns the difference between trading volume and market capitalization. Market capitalization in crypto refers to the total value (in dollars) of a crypto asset as determined by the market and is a product of the total circulating supply of the asset and its current market price. In the above example, it would be 100,000 liters of water.
Volume, on the other hand, refers to the total amount of the asset traded per time. This means that the total amount of the asset traded at any given time is determined by the asset’s circulating supply. With our analogy in mind, the distributor can only distribute the water based on the total supply available, i.e., 100,000 liters. Depending on the number of people who require the water within a period, the volume distributed would either increase or decrease.
Trading volume and market capitalization are similar in that they suggest the relative robustness of a market or an asset. Large-cap cryptocurrencies are more stable to market movements, for example, unlike small-cap assets, which can swing dramatically in any price direction.
Generally, crypto assets are categorized as large-cap, mid-cap, and small-cap cryptocurrencies. Large-cap crypto assets are those with a value of over $10 billion and can necessarily withstand a large volume of traders without its price changing dramatically. (In our analogy, a 500,000-liter barrel would serve more people and withstand the distribution pressure than a 100,000-liter barrel.) Mid-cap cryptocurrencies have values between $1 billion to $10 billion, while small-cap cryptocurrencies are valued at less than $1 billion.
While the market cap depends on the cryptocurrency’s current market value, it does not mean that highly-priced assets automatically have large market caps. The market cap still largely depends on the asset’s circulating supply.
For instance, if asset $CBA has a circulating supply of 450,000 with a market price of $1, and asset $FED has a circulating supply of 150,000 with a market price of $2, then the market cap of $CBA is $450,000 (450,000 x $1), while that of $FED is $300,000 (150,000 x 2). In other words, $CBA has a higher market cap/value and would likely be a better investment than $FED, even though the latter trades at a higher price.
Whereas technical indicators and fundamental analysis get a great deal of attention, many traders can often forget trading volume, which can be costly since it’s a perfect measure of liquidity, providing an insight into whether a trader should enter a trade. Volume also informs traders about the appropriate exit points since it can be used to predict trends, trend reversals, and market strength.
Although high volume usually indicates a highly liquid market with buying pressure, it can also signify a high selling pressure. Traders should keep in mind that the crypto market is a hub for buying and selling (the same is true for virtually all markets). And when a large number of investors are willing to liquidate their assets, there would be a spike in trading volume, which would be accompanied by a price drop.
Finally, trading volume should not be confused with the market cap of the asset. The fact that an asset has a high market cap does not necessarily make it appealing to investors. Market cap is the value of the asset based on its circulating supply and market price. Trading volume, on the other hand, indicates the interest investors have in buying or selling the asset.
Now that you know just that much more about volume in crypto, you can use this newfound knowledge when conceptualizing your trading strategy!