- Volume is one of the simplest yet most critical factors in identifying the potential of a cryptocurrency. It refers to the total number of coins traded in a given period, typically 24 hours.
- Volume is a well-known technical indicator that traders use to track the overall buying and selling of cryptocurrencies. ↑ trading volume means more investors are buying/selling an asset and vice versa.
- Cryptos with a consistently high trading volume show lesser volatility and higher price stability.
- High volume equals high liquidity, low trading costs, and quick order execution. It also helps prevent slippage- the difference between the expected trade price and the actual trade price.
There are plenty of technical indicators to equip crypto traders to make a profitable trade. However, not all are as useful as trading volume.
In the world of crypto, volume is one of the simplest yet critical factors in identifying the potential of a coin or token. Also, it measures the overall momentum and liquidity of the asset during a set period.
Read on to explore what volume is in terms of cryptocurrency, how to measure it, and its implications.
What Is Volume in Cryptocurrency?
The cryptocurrency volume refers to the total number of tokens or coins traded in a given period. In other words, it tells how frequently a crypto asset changes hands. Typically, the timeframe used for measuring volume is 24 hours.
Suppose the total amount of Bitcoin (BTC) traded in the last 24 hours on a crypto platform is $10 billion. Then BTC’s trading volume (24-Hour) on that platform was $10 billion.
Volume is one of the most well-known technical indicators that crypto traders use to track the overall buying and selling of cryptocurrencies.
As of 1st November 2022, Coinmarketcap lists the top 5 crypto assets by 24H trading volume (from all the crypto exchanges).
1. Tether (USDT)
2. Bitcoin (BTC)
3. Ethereum (ETH)
4. Binance USD (BUSD)
5. Dogecoin (DOGE)
What Does the Volume of Cryptocurrency Indicate?
Broadly, the crypto trading volume indicates the activity level in the crypto market.
High trading volume means more investors buy and sell a particular asset, leading to bullish or bearish movements. Low volume refers to a decreased interest in the asset leading to limited buying and selling.
It’s important to note that a low-volume crypto can become a high-volume crypto and vice versa. There could be multiple reasons for this shift, including speculations, higher media coverage, project failures, celebrity endorsements, etc.
Why Is Volume Important in Crypto?
One might not appreciate the significance of volume while trading well-established cryptos like Bitcoin or Ethereum. However, the importance of trading volume becomes apparent when dealing with cryptos having low liquidity on smaller crypto platforms.
Suppose a trader wants to sell one million Bluzelle (BLZ) tokens. There aren’t many exchanges facilitating a higher volume of BLZ tokens. Hence, the trader might have to place dozens of orders to sell one million BLZ. Due to poor liquidity (the ability to buy/sell an asset), the trader gets a slightly lower price for each order than before. This phenomenon is called ‘Slippage‘ — the disparity between the expected trade price and the actual price at which the trade is executed.
In worst-case scenarios, there would be no buy order for the low-volume crypto asset. On the other hand, while trading high-volume cryptos, there is limited scope for slippage.
Crypto assets consistently maintaining high volume usually translate to less volatility and higher price stability. Of course, sudden volume and price changes occur when investors experience extreme fear or greed. But, in general, assets with higher volume lead to decreased volatility.
How Can Investors Read Volume Indicators?
Most traders find it easy to study the volume data. While other technical indicators demand an individual’s analytical ability, the trading volume doesn’t require much analysis as its an objective indicator.
The bottom portion of the below chart represents the volume indicator. Trading volume is depicted as red and green vertical bars on a histogram.
Below are the inferences that can be derived from the volume data.
- Typically, increased selling creates red bars, whereas increased buying leads to green bars.
- The bar’s height reflects the relative volume level — shorter bars represent low volume, and longer bars represent higher volume.
- Volume also reflects the liquidity of the asset. High volume means high liquidity, low slippage, low trading cost, and quick order execution.
Correlation with asset prices
Reviewing the volume data alone provides limited insights. The trading volume makes more sense when viewed along with the asset’s price. The thumb rule is ‘volume increase in the direction of the existing price trend.’
During upward price movement, the volume bars should be larger when prices rise than while falling. Similarly, a falling price leads to a larger volume than a rising price during a downward trend.
However, there are instances where the above scenarios might not occur, leading to a trend reversal. If the price reaches a new high, but the volume doesn’t reflect the high, then the uptrend is weak. It means a trend reversal would happen anytime soon. The same applies during a downtrend as well. During a weak downtrend, the prices reaching new lows would not be accompanied by larger volumes.
You can interpret the Volume-Price indicator for crypto assets in the following manner.
|Implications||– Uptrend intact |
– Increased activity
– Positive sentiment
|– Trend reversal |
– Decreased interest
|– Downtrend intact|
– Increasing activity
– Panic mode
|– Trend reversal |
– Decreasing interest
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Most technical indicators are lagging indicators. They perform calculations based on the asset price. Hence, there is an inherent time lag in providing insights to the trader. By that time, the optimal entry point for a trade would have gone.
On the other hand, volume data is available to traders in real-time. Hence, it proves to be a valuable indicator for making trading decisions.
1. Is high volume good for cryptocurrency?
It depends. High volume indicates increased activity in a crypto coin or token. However, it’s not always correlated with upward price movement. Higher volume can be due to bullish or bearish sentiment. But, crypto assets consistently maintaining high volume usually translates to less volatility and higher price stability.
2. Is low volume good for cryptocurrency?
Mostly, no. Low volume refers to a decreased interest in the asset due to limited buying or selling. Hence, it could lead to higher slippage, low liquidity, and higher cost. In worst-case scenarios, there could be no buy orders for the low-volume crypto assets.
3. What does 24-hour volume mean in crypto?
24-hour volume refers to the total number of tokens or coins traded in the past 24 hours. Suppose the total amount of Bitcoin (BTC) traded in the last 24 hours on a crypto platform is $10 billion; then BTC’s trading volume (24-Hour) on that platform was $10 billion. You can calculate the total volume of BTC by adding the BTC trades that occurred on all exchanges.
4. Is low volume bullish or bearish?
Low volume refers to a decreased interest in an asset. Hence, it typically suggests a bearish sentiment due to limited buying and selling. Moreover, low volume could lead to higher slippage, low liquidity, and higher cost. In worst-case scenarios, there could be no buy orders for the low-volume crypto assets.