What Is Volume in Cryptocurrency?
Trading volume is a metric that investors use to figure out how popular it is to buy or sell an asset at any given time. It shows how often an asset changes hands. Investors look at the trading volume of stocks, bonds, and international currencies, among other things.
Traders use the volume of trades in cryptocurrency, in particular, to figure out how a coin might move in the future.
Crypto Trading Volume Meaning
The volume of crypto trading is a way to track how many times a coin changes hands in a certain amount of time. Investors look at the volume of trades on a particular crypto exchange or on all exchanges together.
Volume is usually measured over a period of 24 hours, and a bar chart is the most common way to show this metric. When there is a lot of cryptocurrency trading, prices tend to go up, and when there isn't much trading, prices tend to go down.
Calculating Cryptocurrency Volume
To figure out the volume of crypto trading, you need to know how much of a certain type of cryptocurrency has changed hands in a certain amount of time. For example, if the total amount of bitcoin (BTC) that was traded on Binance in the last 24 hours was $10 billion, then the 24-hour trading volume of BTC on Binance was $10 billion.
Why Is Volume Important in Cryptocurrency?
When trading coins with low liquidity on smaller exchanges, it becomes clear how important volume is and how important it is to track cryptocurrency. Let's say a trader wants to sell 1,000,000 SHIB coins. But the made-up conversation she is using doesn't have much SHIB volume. To sell 1 million SHIB, you might have to go through dozens of buy orders, each one at a slightly lower price than the last.
This means that the trader gets less money for her coins than she might have gotten if the exchange had more people using it. This is called "slippage." In the worst cases, there might not be any buy orders, so a trader would have to make new sell orders and hope they get filled at some point.
Also, if someone wants to buy a coin with a low volume, they might end up spending more money than they would have if trading volumes were higher. Prices go up when you have to buy up existing sell orders.
Prices tend to be more stable and less volatile when there is more volume. During times of extreme fear or greed, there may be big jumps in volume and big changes in prices. But, in general, coins or assets that consistently have more volume tend to be less volatile.
What Does Cryptocurrency Volume Indicate?
The amount of trading in a cryptocurrency shows how popular it is. When more people buy and sell something, the volume goes up. This can make people want to buy and sell that cryptocurrency even more.
When trading volumes go up, it means that people are either very optimistic or very pessimistic. During their big market runs, meme coins like Dogecoin (DOGE) and Shiba Inu (SHIB) did a lot of business. Over time, people tend to lose interest in these coins, and both the volume and price tend to go down.
A cryptocurrency with a lot of users can become one with few users, and vice versa.
Investors aren't very interested in buying or selling a certain asset if the number of trades is low. This could happen for a lot of different reasons. When prices and the number of trades don't match up, this can mean that prices don't tell the whole story.
Can Volume Be Faked in Crypto?
Yes, it is possible to swap volumes. This is called "wash trading." This is when you put in orders to buy and sell almost at the same time. The orders can cancel each other out so that the markets don't move much. This makes it seem like the market is busy, but it's just noise.
Messari, a firm that does research on cryptocurrencies, says that "it is well known that many exchanges use wash trading to boost trading volume."
The exchanges may think that more traders will use their platform if the volume is high, and the more traders who use their platform, the more money they make.
Wash trading can happen in a number of ways, such as:
Many of the fake volumes in cryptocurrency markets may be caused by high-frequency trading (HFT) algorithms. These are basically computer bots that can make many trades quickly.
Concerns about the fake volume on exchanges may be one reason why some traders prefer decentralized exchanges, where it's harder to fake volume.
Crypto by Volume
Coinmarketcap is often used as a source for prices and trading volumes of cryptocurrencies. But the site doesn't tell the difference between exchanges where there may be a lot of wash trading and those where there isn't. Messari gives "real" volume data from exchanges that they are very sure don't do "wash trading."
It's important to make this difference because when you look at the volumes of different coins or exchanges, the results can be very different depending on where you look.
Is Volume a Necessary Metric for Valuing Coins?
Many crypto traders think that volume is the best way to figure out how much a cryptocurrency is worth.
In 2018, almost 40% of 39% of people who answered a Coindesk survey chose volume as the indicator they couldn't live without. The main reason they gave was that other technical indicators depend on how well a person can read crypto charts, while volume is a more objective measure.
When both the price and the number of trades go down, traders may think that the market is tired and will soon turn around. On the other hand, when the price goes up but the volume goes down, investors often see that as a sign that prices will soon go down.
One trader told the Coindesk survey that the amount of trading "speaks to the sincerity of price action." In other words, the way prices move on their own can be misleading. When volume is taken into account, it can be easier to get a fuller picture of how the market is doing.
Cryptocurrency volume trading is a way to track how many transactions are being made with cryptocurrencies. A lot of what has been talked about here also applies to the volume of stocks, but there are more rules about wash trading in stocks.