🌼What Does Volume Mean in Cryptocurrency?

BY DANNY COIN

Volume in cryptocurrency refers to the amount of an asset traded within a specified period. Simply put, it measures the times a digital asset changes hands in a certain duration.

Traders and investors evaluate crypto volume by reviewing the number of trades occurring over a few or all exchanges. In this article, we’ll read about crypt trading volume, exploring common volume indicators and the methods to read these crypto volumes.

Understanding Crypto Trading Volume

As explained earlier, the trading volume shows the number of trades made regarding the asset. Typically, the time frame set to evaluate the volume is 24 hours and is displayed using a bar chart. The volume is shown in dollars or the number of units.

Tracking the trading volume holds great significance for the trader. Let’s better understand this with a simple example.

Suppose a trader wants to sell 50,000 crypto coins, but the exchange they use needs to have a required trading volume. The trader will have to place many buy orders to sell these coins, with each order lower in price than the previous one.

The trader could have made more money selling their digital assets if the exchange had the required volume. Likewise, a trader wanting to purchase a large volume will spend more if the desired volume is unavailable at the exchange.

When there is a higher volume, it means the market is less volatile, and the asset has a stable price. In contrast, lower volumes translate to increased volatility and price fluctuations.

Technical Indicators Related to Volume

Let’s take a look at technical indicators:

Price Momentum

The crypto trade volume is an excellent indicator of the price momentum. Increased purchases of a digital asset can increase the price of crypto, but the availability of the required volume is crucial for the price to be stable.

This scenario translates to increased price momentum. Likewise, if the prices are increasing, but the volume decreases, there will be a declining momentum and a possible shift in the market’s direction.

Liquidity

The asset’s liquidity is linked to the trading volume. Liquidity indicates the ease with which you can trade the asset at the current market price. A high volume increases liquidity and keeps the asset’s price stable. The frequent price fluctuations are also reduced, making the value consistent.

Market Spikes

A high or low volume is also associated with spikes and exhaustion. For example, a high trade volume can indicate a spike in buying, whereas a low trade volume shows traders selling the asset.

Money Flow Index

It is an index that uses the trade volume to show whether overbuying or overselling occurs in the market. It reveals whether the market is getting heated.

If the MFI has a value of 20 or lower, it suggests increased selling volume. Likewise, 80 or higher indicates a price reversal.

Market Strength

The trading volume significantly influences a substantial change in the market.

For example, if the price change is increasing or decreasing with a higher volume, there will be a considerable impact on the price, but if there is a low volume, the price change will be insignificant.

Market Trends

Understanding the volume is crucial if a trader wants to know current market trends. A spike in the price of a digital asset accompanied by a high trading volume suggests a strong market trend, whereas a price fluctuation with a low volume indicates a weak trend.

An uptrend in the market accompanied by a high volume shows the buyer’s interest in the asset and increases the price. However, if there is a declining market trend with a high volume, traders will be more inclined to sell the asset and show little interest in purchasing.

Market Accumulation

Reviewing the crypto volume can reveal whether the market has spot accumulation. Whenever there is a bleak price movement but a higher spike in volume, it indicates spot accumulation.

This happens when major investors buy the assets slowly over a period in massive volumes. A price surge is expected right after the end of the accumulation. However, this surge will be short-lived, and prices can drop if the asset cannot capture the trader’s interest.

Market Reversal

When the trading volume keeps decreasing despite the price movement, it indicates a market reversal. A price hike with a lower volume shows decreased purchasing which can lead to a price drop.

In contrast, a decrease in price with a low volume indicates a decline in selling, which can result in a price surge.

High Volume in Crypto

As explained earlier, high trade volume shows the buyer’s interest and indicates a price increase. In a high-volume market, it becomes easier for traders to buy and sell.

However, this high volume can also mean forthcoming changes in the market dynamics. It can indicate the start of a bear market trend or its peak, after which the price might decrease due to the increased selling pressure.

Low Volume in Crypto

A low trade volume in crypto shows a decreasing buyer interest. This makes it difficult for traders to trade assets, as they will face low liquidity and decreased prices quickly. Assets with a low volume are incredibly volatile as their prices can be controlled and manipulated.

This manipulation is done by purchasing the low-volume asset at a higher price than usual to create an uptrend that can bring in more investors, ultimately increasing the asset’s value.

Reading Volume on Crypto Charts

If you are new to the crypto industry, it’s best to start with the basics of chart reading and familiarize yourself with the terms and indicators displayed on the chart.

On a crypto chart, the candlestick indicates a trade. The length of the candlestick indicates the volume. If the candlestick is long, the trade volume will be higher.

You will also see two-colored candlesticks where green tells whether the buyers are interested, and red reveals selling pressure. It will take a bit of time to get accustomed to these parameters, but making these efforts will assist in making your trades more profitable.

Can Crypto Volume Be Manipulated?

Crypto volumes can be faked and manipulated through a cruel practice called wash trading, where buying and selling orders are placed at the same time.

These buy and sell orders will not affect the market, giving a notion that the market is active and trading, but in reality, there will be no material movement.

Many exchanges use this wash trading practice to keep the trading volume inflated. They do this because a higher trade volume increases the trader’s trust in the platform.

Wash trading is also conducted between two traders or using high-frequency trading algorithms to manipulate the market. These bots can make a large number of trades in a short period, faking the trade volume.

Final Thoughts

Although conducting fundamental analysis and technical accounting indicators are crucial when trading crypto, most traders need to pay more attention to the trade volume.

Knowing the trade volume and related technical indicators can reveal whether the market is feasible for a trader. Understanding the trade volume can also aid in knowing when to exit trades, as it can predict trends, market reversal, and market strength.

Please remember that trade volume should not be confused with a market cap as it’s the asset’s value relative to its market value and supply. It will take time to grasp the concept of trade volume, but in the end, it will be a fruitful effort to make it easier to conceptualize your trading strategy.