What Is Volume in Cryptocurrency Trading?

Report: Bitcoin Trading Volume Down in 2021, Despite Bull Market
Bitcoin becoming more and more liquid over time- big volumes when there are big price moves. Source: CryptoVantage.com

Volume in cryptocurrency trading

‘Volume’ or trading volume in crypto trading is simply the sum total of coins transacted between buyers and sellers for one cryptocurrency over a given time period, usually an hour or 24 hours. When trading volume is high, lots of coins are changing hands quickly. When volume is low, not many people are either buying or selling coins of a cryptocurrency. High liquidity means better and more accurate trade order execution, which we’ll get into below. Although there are no specific trading hours for cryptocurrencies because cryptocurrencies are not stocks, crypto trading volume still tends to swell around the opening and closing of US, European, and Asian stock markets. This is because there are several trusts and ETFs worldwide that are tied to cryptocurrency assets [i.e. the Grayscale Bitcoin Trust in the US].

Why volume is important

When you’re ready to buy or sell a crypto (whatever the price is), you would hope there are plenty of sellers that are selling at the exact price you’re seeing on the Coin Market Cap ticker- the same being true for buying. If a market has low liquidity, you’ll  have to submit to a less than desirable outcome (low price on selling/higher price on buying) than you would’ve liked.

This is what’s called “slippage”- that is, when you sell your coins you receive a price of up to 10% less than what you ask for or when you buy your coins you have to pay up to 10% more than what you agreed to pay. This obviously sucks, and it happens quite a bit in the crypto markets relative to stock markets because cryptocurrency is by far a much smaller space with less liquidity (matching buyers to sellers). If volume is high, there’s a much better chance you’re going to be able to buy/sell at whatever the “true” price is.

How volume is used in analysis

The trading volume of a crypto is a signal to investors of the strength of a price trend, whether up or down. I.e. when the price of Ethereum is rising and Ethereum trading volume is very high, it’s quite likely that the upward trend is strong and may continue. The same is true for decreases in price accompanied by high volumes- the price is likely to go lower.  Thus it helps to think of trading volume as an indicator of price momentum. If a coin has been trading in a certain price range for a while, and volume is starting to pick up, it could be a sign that coin is going to break out of that range, either to the upside or downside. Aren’t volume indicators cool? Unfortunately we’ll see getting clear volume signals isn’t as straightforward as we’d like. 

What is exchange volume faking/wash trading?

Wash trading is when a seller buys and sells a cryptocurrency near simultaneously in order to make trading volume numbers appear greater than they are. As we’ve shown, traders are attracted to spikes in trading volume, often interpreting these spikes as bullish signals. Both exchanges and whales tend to benefit from huge swings in volume- exchanges earn their fees on trades and whales do well when whatever coin they’re holding gets a lot of attention. Newer exchanges (like Gate.io or Uniswap or KuCoin) want to attract new users and/or steal customers from the big ‘legacy’ exchanges like Coinbase and Binance, so these newer exchanges have incentive to pump up their trade volumes to convince new users that they are legit. Additionally, new coin projects [like recent ICOs] are usually looking to get listed on exchanges so their project can be financed (a lot like a company issuing shares so it can raise money). These new coin projects are going to be attracted to the exchanges with the highest volumes which would give them the best chance at raising liquidity (money). 

Beware of exchange volume faking

If you haven’t noticed by now, a huge downside of the cryptocurrency space is that there is widespread lack of trust, and scammers and shitcoins in every corner. Much of what’s illegal in stock markets is still legal in the crypto space. As a matter of fact, in 2013 the Commodity Futures Trading Commission banned High Frequency Traders (HFTs) for using a software that artificially pumped the volume of markets. Guess what? That software is now used in the cryptocurrency space to do the same thing to crypto markets. Wouldn’t it be nice if the volume indicators weren’t so fraudulent? In the crypto space we tend to get all doom-and-gloom when there’s talk of regulation, but the fact is that regulation can make the cryptocurrency game safer and thus attract more investment, pumping up the prices of your coin holdings.

Checking Volumes

If you do choose to monitor volume and use it as part of your trading strategy, I’d recommend looking at CoinMarketCap rather than getting the volume statistics straight from the exchanges. Exchanges are incentivized to pump up their volume numbers to signal to investors the liquidity they have and thus attract more people. Lastly, remember that volume is just one indicator among so many that are important for trading signals, including Relative Strength Index (RSI), Bitcoin dominance, the Fear and Greed index, and 50, 100, and 200-day moving averages.

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The Fear & Greed Index

  • Today Neutral 51
  • Yesterday Greed 61
  • One week ago Neutral 51
  • One month ago Fear 27

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