What is a trading volume in cryptocurrency and why is it important?
Learning all of the metrics is an important part of evaluating the investment potential of a particular cryptocurrency. One of the most important ones that new investors should focus on is trading volume.
Trading volume can make or break your trades, and it’s important to know when to pass on an investment that doesn’t have their ducks in a row here. How does it work though? In this article we’ll find out!
Cryptocurrency trading volume definition
Trading volume is the amount of activity that is surrounding a coin or a token. This metric will allow you to see how popular an asset is and how frequently it is changing hands. It’s a ledger of the buying and selling activity surrounding each coin or token, and it can be very useful for planning your trades.
Investors should keep in mind that this is only the publicly traded volume and it is perfectly possible that large sums of cryptocurrency are being traded privately through OTC markets, and what is shown is not the entire market.
How crypto trading volume is calculated and measured?
It is normally measured by the amount of activity within the past 24 hours. Investors should keep in mind that there is trading volume on a crypto exchange and then there’s also a general trading volume which takes into account aggregated data from all exchanges. Some exchanges will naturally have more volume, making it easier to trade that asset.
Why is it important?
Cryptocurrency trading volume is important in identifying healthy investments. A coin or token may look good on paper, but if it has no trades then it could be dangerous to deal with it. Assets with low volume could be a sign of a dead project, and they could even be delisted from an exchange for it!
You can also use unusual trading volumes to identify opportunities which could make you money in the current market as this will likely drive up the price once investors have exhausted the current available stock on the order books.
Trading volume example
Jimmy has been watching a certain token for a while, and he begins to notice a pattern. The trading volume is steadily rising, and he takes this as his signal to begin buying in. He takes a position for a reasonable price, and within a few days, the volume has exploded for his token.
The price goes up. He continues to watch the chart, and soon he begins to see the trading volume is falling. He feels that the asset’s price will not be supported by current volumes and he sells to take his profits. It seems he was right, within a week the price of his token begins falling due to lack of demand. Jimmy has preserved his gains by identifying the importance of trading volume.
How to analyze it?
Almost every exchange will show you the trading value on their exchange, but this can sometimes be misleading. For many cryptocurrencies, the bulk of the trading volume is limited to just a few exchanges. This means you may not be getting the whole picture.
It’s important to use an aggregated tool to compare the total trading volume. Compare it to other cryptocurrencies and its own timeline to see whether the price is sustained or if there is an opportunity coming.
How trading volume and cryptocurrency price are connected?
Large amounts of trading volume lead to many interested investors. If the volume is supporting a certain price level and the traders burn through the orders in the book, then the price will likely need to go up in order to accommodate new orders if additional volume comes in.
Likewise, if the volume begins to fall then the price will also likely go down because there’s no enough demand to buy up the exchange’s inventory. Learning to read the volume and the order book to see when these things happen can lead you to many profitable crypto trades.
Why does trading volume decrease?
It decreases when investors become pessimistic about an investment, or even the entire market. If this happens then they may begin taking money out of the cryptocurrency market and the trading volume of the entire market decreases.
If you begin to see the activity regularly decrease on your investments, then you may need to be proactive to protect your capital. Consider moving some of your money to safer areas or maybe even shorting some assets which may decrease in value due to the lack of trading volume.
What is abnormal trading volume?
Abnormal activity refers to sharp spikes in volume for an asset. This is common in cryptocurrencies, and it can be dangerous to investors. In many cases, assets with sudden large trading volume spikes could be trading at inflated prices, and you should be careful that you’re not paying more than the token or coin is actually worth. If you already own assets which are starting to look inflated, then it’s likely a good time to collect profits before the party ends.
Trading volume and volatility
In most cases, cryptocurrency assets which have large amounts of trading volume will be less volatile than those with less. However, abnormal activity may not follow these rules. The reason for this is that it takes larger and larger buys or sells to move the market, creating more stability since more people are trading in these larger cap markets. This makes them a little safer, but the trade off is that there is less room for profit.
Is high trading volume good or bad?
Higher trading volume in crypto is mostly a good thing. It often leads to more stability and more liquidity for the market, making it easier for you to trade! However, lower volume assets may actually be more profitable, because they are subject to larger swings in price.
This is, of course, referring to natural and healthy volume levels. Hyperinflated and hype-driven volume can be dangerous and you should move cautiously when making trades here.