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Understanding Crypto Trading Volume & Its Significance

Updated on :  

08 min read.

Several cryptocurrency traders see trading volume as the most vital metric for valuing a particular coin.

In 2018, CoinDesk Markets conducted a poll which revealed that volume was the preferred price indicator for around 38% of the respondents. The major reason they gave was that volume is more objective while other technical indicators rely on one’s ability to interpret charts. 

If you wish to enter crypto trading, here’s all you need to know about understanding trading volume and its significance.

Let’s take a closer look.

What is crypto trading volume?

Crypto trading volume measures the number of times a particular coin changes hands over a certain time frame. Investors refer to this metric to see how popular it is to sell or buy a particular asset at any given time. They analyse crypto trading volume based on the trades on all cryptocurrency exchanges combined or on a given exchange. 

Usually, the most common timeframe for measuring crypto trading volume is 24 hours.

Calculating crypto trading volume

To calculate cryptocurrency trading volume, you need to determine the total amount of crypto that changed hands or was traded in a particular period. 

For instance, suppose the total amount of Bitcoin traded in the last 24 hours on Binance summed up to $10 billion. In that case, the 24-hour trading volume of Bitcoin on Binance will be $10 billion.

What does crypto trading volume indicate?

Cryptocurrency trading volume is an indication of interest in a particular coin. The more the number of people selling and buying crypto, the greater the volume. And that can drive even more interest in that coin.

It is not surprising that crypto trading volume tends to increase as their prices shoot up, with new investors piling in and giving rise to a feeding frenzy. In late July 2021, Bitcoin’s price hit $40,000, and the trading volume touched $9.2 billion. This resulted in a rebound in both volume and price.

Low crypto trading volume implies that investors may not be interested in selling or buying an asset. And there can be several reasons for that.

Surges in crypto trading volumes indicate either strongly bearish or strongly bullish sentiment. Meme coins like Shiba Inu (SHIB) and Dogecoin (DOGE) have witnessed substantial volume during their huge market run-ups.

Over time, interest in cryptos may tend to wane, and volume can reduce along with the price. Again, high-volume crypto can become low-volume crypto and vice versa. It is worth noting that if trading volumes and prices diverge, it can be a sign that prices are not telling the entire story.

Typically, high crypto trading volume can indicate a rise in prices, and low volume could imply prices are falling.

Significance of crypto trading volume

Crypto trading volume is important as it helps you identify a coin’s possible direction. 

Many consider that crypto with the highest trading volume makes for the healthiest investment. Generally, high trading volume translates to higher stability and liquidity. On the other hand, a low trading volume proves to be a red flag for a coin which may be dead in the water. Exchanges may even delist a coin if it’s gaining zero traction.

The amount of a token or coin changing hands indicates the market sentiment and its popularity. Traders can examine volume in several ways by breaking it down, which will help make an educated prediction on pricing points. 

As a trader, you can examine trading volume by a week, 24 hours, or even 30 days. Looking into all these results will help you spot whether a coin’s fluctuations are normal or point to a major decline or breakout. 

Crypto that sees heavy movements frequently will naturally garner less attention when there is high trading volume. However, if a coin with a usually lower trading volume witnesses sudden hefty trading over 24 hours, it can indicate that something or someone is making it move.

Now, for example, if a particular crypto witnesses a sudden jump in its value by 30%, it may look great on paper. But still, investors may remain cautious if the coin is experiencing low trading volume. This is because it can indicate that the price hike will not last, and a correction is on its way.

Also, it can be a sign that only a handful of people are trading, implying crypto whales are manipulating the price.

Final word

Trading volume in crypto is an essential metric for assessing a particular coin’s health. Analysts always tend to examine the trading volumes besides other vital metrics like circulating supply and market capitalisation while identifying early-stage coins with a high chance of success.

As a crypto trader interested in this metric, you must watch out for a coin witnessing significant activity on several exchanges and not just on a handful.