What Is Trading Volume?
Crypto trading volume is the total amount of money exchanged in a cryptocurrency market during a specific period.
It combines the volumes from both centralized and decentralized exchanges.
Traders and investors rely on this metric to assess market sentiment and determine the value of a particular crypto asset.
The trading volume is typically reported in USD but can also be denominated in BTC or other currencies.
The volume provides insights into a cryptocurrency’s direction, movement, and future price and demand predictions.
The 24-hour volume section on platforms like CoinMarketCap displays the total value of crypto traded in the past 24 hours.
Why Is Trading Volume Important?
Trading volume is an essential indicator for traders to assess the future profitability of cryptocurrencies.
High trading volume also generates revenue for exchanges through trading fees.
A greater volume of cryptocurrency transactions promotes fair pricing and reduces the potential for distorted prices.
Conversely, low trading volume indicates inefficiency or limited trading activity, where sellers’ asking prices fail to meet the bids of potential buyers.
What Is the Difference Between Trading Volume and Liquidity?
Cryptocurrency volume shares similarities with liquidity, but they represent distinct concepts.
Volume reflects the total value of actual trades executed, while liquidity refers to the availability of assets for trading at specific prices.
Typically, higher trading volume correlates with greater market liquidity.
However, low-volume exchanges can present attractive arbitrage opportunities, where certain coins or tokens can be purchased at a low price on one exchange and sold at a premium on another.
This situation often arises when a coin has low demand or an exchange experiences operational issues.
What Are Common Crypto Trading Volume Indicators?
Several indicators are commonly used to analyze crypto trading volume:
- Moving average of Volume (MAV): Helps identify the overall trading volume trend.
- Volume-weighted Average Price (VWAP): Calculates the average price of a security based on trading volume.
- Volume-based Oscillators: Measure changes in trading volume over a specified period, such as On-Balance Volume (OBV) and Chaikin Money Flow (CMF).
- Accumulation/distribution Indicator: Compares the closing price of a security to its trading range over a given period.
- Volume Bars: Displays the volume of trading activity over a given period.
How Does Trading Volume Affect Cryptocurrency Price?
Trading volume is one of the most important indicators of cryptocurrency price movements.
As trading volume increases, the price of a cryptocurrency tends to rise.
This is because more people are buying and selling the cryptocurrency, creating higher demand and increasing prices.
However, it’s important to note that higher trading volumes do not guarantee price increases.
They can also indicate speculation and market manipulation.
Analyzing trading volume alongside other indicators provides a more comprehensive understanding of cryptocurrency price dynamics.