What Is Crypto Trading Volume? Beginner’s Guide

Sep. 10, 2023
What Is Crypto Trading Volume? Beginner’s Guide

Trading volume is an important metric in crypto investing and trading. Investors examine trading volume to determine how quickly a crypto asset is purchased or sold, indicating its popularity at a particular time.

Let’s discuss why crypto trading volume is essential, how it affects crypto prices, and the best technical indicators for volume.

Crypto Trading Volume

The trading volume of a digital asset refers to the total number of units traded on decentralized (DEX) and centralized crypto exchanges (CEX). Usually, it is expressed as the number of tokens or coins of an asset traded in 24 hours. 

The second method to measure volume is to add the total value of all trades in a specific timeframe, measured in dollars. The trading platform, not the blockchain, records transactions on an exchange. As a result, trading volume is often known as “off-chain volume.”

If there were 200 Bitcoin (BTC) traded on crypto exchanges in the past 24 hours, the trading volume would reach $3.2 million, given a stable price of $32,000 for Bitcoin during this timeframe. The equation is the price of the coin (when the trade was made) × the number of coins traded.

What Are The Highest Volume Cryptocurrencies?

No doubt, most of you would guess that BTC is the highest-volume virtual currency. Occasionally, this holds true, but stablecoins generally dominate the trading volume. All cryptocurrencies are stablecoins instead of BTC and are safe for investors to join the blockchain world.

To avoid losses during periods of significant crypto volatility (such as mid-2022), traders may frequently sell their crypto into a stablecoin such as USD Coin (USDC) or Tether (USDT). 

At the time of writing, the top 10 cryptocurrencies with the most significant trading volume are:

  1. USDT
  2. BTC
  3. ETH
  4. USDC
  5. TUSD
  6. BUSD
  7. XRP
  8. WETH
  9. BNB
  10. LTC

Importance Of Trading Volume In Crypto

The trading volume metric is not exclusive to the cryptocurrency industry. It has been an essential aspect of the traditional financial system for over 100 years. Stock investors utilize it to determine the sale and purchase of stock shares.

Likewise, in the crypto world, volume tracks a coin’s trading activity, showing its performance in the market. Moreover, it is one of the most valuable metrics to inform you about liquidity, price movement, market strength, and trends.

This is crucial when choosing whether to buy or sell a crypto asset. Below are some ways how trading volume can help your fundamental and technical analysis:

Understanding Market Trends

Trading volume in crypto is essential because it shows how the crypto market is moving. When an asset’s price fluctuates with high volume, it shows a strong trend. Conversely, when price fluctuations generate low trading volume, this is usually a sign of a weak trend.

It shows the developing interest between sellers and buyers and a specific coin’s selling or buying pressure. Hence, volume tracking can help you gauge the market’s overall strength.

Measure a Cryptocurrency’s Liquidity

Liquidity indicates how easy it is to trade a crypto asset at its current price. Higher trading volumes show less volatility and stable liquidity. In particular, crypto with a large trading volume is usually traded frequently and quickly. 

However, high volume does not always indicate a good sign. It can show panic selling, too.

Detecting Reversals In Cryptocurrency Trends

For identifying trend reversals in the industry, the trading volume metric is helpful. When trading volume decreases with price change in a particular direction, it may indicate a potential reversal. Usually, low volume and selling pressure lead to a decline in asset price.

Allows You To Assess Market Accumulation

When analyzing the market, accumulation trends are significant because they highlight when high-net-worth traders are purchasing the assets. Typically, cash flows from large wallets encourage good price action.

Therefore, understanding accumulation can help individuals determine the right time to buy crypto.

Effect of Trading Volume On Crypto Prices

Effect on prices

Trading volume shows the level of buyers’ interest in a particular cryptocurrency. It also creates a balance between demand and supply. The price surge of tokens usually comes when the volume boosts and more liquidity enters the market.

However, if the volume goes down and liquidity is low, the token’s value might decrease. In crypto trading, stablecoins like USDC and USDT are utilized to measure how much crypto is being traded. On BTC, the measurement involves the amount of Bitcoin traded for USDT and vice versa.

When more people exchange their USDT for BTC, it indicates a liquid inflow into BTC. Correspondingly, with the spike in volume, the bitcoin price will increase.

Effect Of Liquidity On Crypto Price

Due to its impact on price dynamics, liquidity influences trading volume. This trend is more clear in smaller coins. The typical liquidity-to-market-cap ratio for most coins is often around 1:10. For example, the market cap will roughly be $100 million if a coin has $10 million in liquid backing.

When a big player sells a lot of the coins all at once, draining the liquidity, the trading amount suddenly increases, leading to the price dropping sharply. Elon Musk sold approximately $2 billion worth of BTC in the past year on the open market.

The sale of $2 billion led to a minor decrease of less than 6% thanks to BTC’s huge liquid backing. BTC bounced back quickly and recovered despite the multi-billion dollar sell-off. However, if AVAX or SOL were to sell for $2 billion, it could result in a catastrophic collapse due to their small market capitalization and liquidity.

Trading Volume Vs. On-chain Volume

Trading volume looks at exchanges, but on-chain volume shows how much cryptocurrency is moved on the blockchain in a certain period. On-chain volume provides a more comprehensive view of cryptocurrency operations.

It shows exchange-based trading and transfers for various purposes, such as remittances or payments. However, each metric has its own significance.

Trading volume excels at reflecting short-term market liquidity and sentiment, while on-chain volume highlights network-wide usage and long-term holding practices.

Trading Volume Vs. Market Cap

Market capitalization plays a vital role in assessing a cryptocurrency’s potential. You can find market capitalization by multiplying the total tokens or coins by their current price. It does not show the full picture of market activity.

The market cap provides information about a digital asset’s growth potential and size. However, trading volume analysis adds to your knowledge.

A cryptocurrency with low trading volume and high market capitalization may indicate a lack of liquidity or investor interest. In contrast, an asset with high volume and low market cap reflects investors’s attention.

Best Indicators To Measure Volume

Trading Volume Indicators

Volume measurement is critical to a successful marketing strategy. Assume you are betting on the price of Ethereum or another cryptocurrency rising or falling. In that instance, you must check volume information to determine whether there is a liquidity outflow or influx.

Notably, the price will stay steady if the amount of trading stays unchanged, and you won’t be able to make a profit from any percentage changes.

Following are some of the best volume indicators:

  • Chaikin Money Flow (CMF): CMF uses both price and volume to assess the flow of money into or out of a cryptocurrency.
  • On-Balance Volume (OBV): This indicator combines price movement and trading volume to measure buying and selling pressure.
  • Volume Weighted Average Price (VWAP): It calculates the average price of an asset, considering trading volume. It aids traders in identifying significant price levels.

Can Crypto Volume Be False?

Yes, fake volume happens when traders repeat buying and selling to show high activity. This “wash trading” is illegal, tough to catch, and can involve multiple addresses. Certain exchanges faced such claims. So, research well and use trusted platforms for trading.

Is High Trading Volume Good?

It’s not a constant rule. Higher volume indicates increased market attention and the possibility of the coin’s value rising. However, it can also signal the start of a bear market as more individuals sell in anticipation of falling prices.

Is Low Volume Bad?

Yes, low trading in cryptocurrency is negative as it suggests people aren’t interested in a coin, often causing its price to drop. Nonetheless, low volume can also favor traders because it makes price shifts more significant. 

Bottom Line

Whether trading Bitcoin or an altcoin, keeping an eye on volume is important. This allows you to examine the crypto’s price direction and liquidity levels. If you want to invest in a solid project with enough liquidity, choose cryptocurrency with a trading volume in the billions. Checking that your trade direction matches the volume pattern to ensure profitability is also crucial. Moreover, tools and indicators assist in making well-informed decisions.

Syed Ali Haider

Researcher & Editor
Ali Haider is a Blockchain enthusiast and writer passionate about enhancing the acceptance, adoption, and integration of Blockchain technology worldwide. He has also advocated for digital freedom and cybersecurity for many years.