What Does Trading Volume Mean in Cryptocurrency? – A Complete Guide

Understanding Trading Volume and Its Importance in Cryptocurrency 

In the world of crypto, trading volume is the number of tokens bought and sold during a specified period.

For the informed investor, trading volumes provide a bevy of valuable information that can help you make the best trades possible and maximize your alpha.

Higher trading volumes indicate a healthy market with deep liquidity and solid demand – factors that are crucial for efficiently entering and exiting positions.

Lower trading volumes can point to limited liquidity, low demand, and, in some cases, scam projects.

Trading volume also factors into price discovery – when more traders engage with a market, volume rises, increasing demand on the available supply, leading to price fluctuations.

There are a variety of methods for measuring trading volume. Calculating trading volumes in crypto is not as straightforward as with more traditional assets as digital assets trade 24/7 in jurisdictions around the world on both centralized and decentralized exchanges.

Off-chain Trading Volume

Luckily, sites like CoinHint.com provide volume data, for most popular tokens, across all reputable centralized exchanges.

To determine the trading volume for a particular token, locate it on the list of tokens provided by these websites, and find where the 24-hour trading volume is listed.

On-chain Trading Volume 

When it comes to calculating on-chain trading volumes in the world of decentralized finance (DeFi), websites like DeFi Llama provide a comprehensive view of trading volumes that take place on decentralized exchanges like Uniswap.

The front page of DeFi Llama provides a general overview of stats for the whole DeFi space, and users can filter the information to look at the daily, weekly, or monthly time frames for the most popular blockchains and DeFi protocols.

In the Chains subsection, users can see the total trading volumes on specific blockchains, the weekly change in trading volume, and cumulative trading volumes.

Aside from the basic trading volume metric, a variety of tools exist to help you analyze trading volumes and make better-informed trading decisions. Here are a few popular options:

Relative Volume 

Relative volume, or the amount of volume that is associated with price movement, provides insight into price direction.

Most trading charts offer this by selecting the Volume indicator from the menu, which provides a volume bar chart, usually at the base of the price chart.

On candlestick charts, higher bars signify greater volumes, green bars are associated with a positive price movement for that specific candle, and red bars indicate a falling price for a given time and volume.

On Balance Volume

One easy to use, highly valuable indicator is called on Balance Volume (OBV), which assists traders in analyzing the impact of a change in trading volume on the price of a cryptocurrency.

Rather than calculating the OBV for themselves, traders can view simple line charts that reflect the trend in the relationship between price and volume.

When the OBV line is on a downward trajectory, this indicates a decrease in buying volume, reflecting a bearish market trend, while an upward trending line, indicates a bullish trend.

Money Flow Index 

Money Flow Index (MFI) measures the rate at which money flows in and out of a particular cryptocurrency, which helps to identify buying and selling pressure within the market.

The MFI runs from 0 to 100 and uses volume as an indicator for oversold or overbought conditions. Values higher than 80 indicate a price reversal could happen due to excessive buying volume, while values lower than 20 indicate excessive selling volume and oversold conditions.

In general, higher trading volumes are associated with price increases as volumes tend to dwindle during stagnant or bearish periods and spike during bullish periods.

The one caveat to this understanding is when markets flip from euphoria to a downtrend, as traders will sell en masse to exit declining positions, which causes a spike in trading volume.

High volume equals market strength – Strong selling can elevate trading volume while the price decreases, and traders looking solely at trading volume can suffer losses.

Low volume means lack of interest – Sometimes, long periods of consolidation can lull traders into complacency, especially during bear markets. This can lead to hesitancy to re-engage, but that doesn’t mean there is no interest in that asset.

The Future of Trading Volume in Crypto Markets

The crypto market is anticipated to exceed a global trading volume of $108 trillion by the end of 2024 – a 90% volume increase in just two years. Moreover, analysts predict the bull market will continue into 2025, and trading volume is expected to remain high.

Inevitably, a crypto winter will come, with declining trading volumes, just as traders saw in the 2023 bear market. However, traders can prepare for the end of the bull market by understanding trading volumes, which will enable them to successfully time their crypto market entries and exits.

Understanding cryptocurrency trading volume and how to incorporate that information into a trading strategy is a crucial piece to navigating the crypto market effectively. Using the insights provided in this article, you can now devise a successful trading strategy that accounts for trading volume and how it affects the market.

Volume indicators such as On Balance Volume and the Money Flow Index help to simplify the process of analyzing trading volume.

When combined with other analysis tools, trading volumes help provide a comprehensive understanding of market forces, allowing traders to make better-informed decisions and capitalize on price fluctuations.