Summary:
- Volume is the cumulative sum of crypto being bought and sold on the market; for example, if $200 billion in BTC is traded daily, the daily volume of BTC is $200 billion.
- High trading volumes are generally linked to fast appreciation or depreciation of a crypto price; traders can increase their profit margins by trading volatile assets.
- Volume is an important metric to look at when trading, because a greater volume of a cryptocurrency being traded leads to fairer cryptocurrency prices and reduces price distortion.
The whole premise of crypto trading or any trading, in fact, is to buy low and sell high, and millions of people partake in this industry worldwide.
One of the most important trading metrics is volume. Volume tracks the total amount of crypto being traded across all exchanges in the world and shows when trading spikes. Volume is arguably the most important metric for day traders.
In this guide, we’ll overview the importance of volume, how it affects crypto prices, how to research volume for cryptos, and the best indicators for volume trading.
What is Trading Volume in Cryptocurrency?
Trading volume is the sum of all trading for a particular coin that happens on centralized (CEX) and decentralized (DEX) crypto exchanges during a certain time frame, measured in dollar value. Volume is also used in stock trading to measure how many stocks were bought and sold. Generally, the higher the trading volume, the higher the price volatility.
Bitcoin’s daily trading volume according to CoinMarketCap.
In other words, trading volume often spikes when there’s significant price movement. For example, when Bitcoin was crashing to $5,200 during the Covid Dip of 2020, its trading volume was one of the highest in its 11-year history.
Why Does Trading Volume Matter in Crypto?
A greater volume of cryptocurrency being traded leads to fairer cryptocurrency prices and reduces price distortion. A low trading volume may be a signal of lack of market interest, as the asking prices of sellers fail to meet the bids of potential buyers.
Is High Trading Volume Good In Crypto?
Not always. High volume does often indicate more market interest in a coin and its potential appreciation in value, but it can also mark the beginning (or a peak) of a bear market as more people sell off in anticipation of prices going down.
How Does Trading Volume Affect Cryptocurrency Price?
Volume affects crypto prices due to liquidity. If a crypto has an inflow of new liquidity, the price will appreciate. The opposite applies to an outflow of liquidity, and the price depreciates.
In crypto trading, liquid stablecoins such as USDT and USDC are used to measure the volume of crypto being traded. On Bitcoin, we measure the amount of BTC being traded for USDT and vice versa.
If more people are trading their USDT for BTC, this means there is a liquid inflow into Bitcoin and the price action is bullish. The Bitcoin volume measurement will increase, and with the spike in volume, Bitcoin will rise in price.
All crypto pairs on Phemex have a volume indicator available by default. If we head to the BTC/USDT pair chart, the bars at the bottom indicate the total trade volume, and the green/red colors indicate if the volume leads to more buys or sells:
Volume indicator on Phemex’s most traded Bitcoin pair.
Historically, volume peaked during the biggest crashes. If we compare the current bear-market volume when Bitcoin is trading at $23,000 to the all-time high volume when Bitcoin was trading at $69,000, we notice the volume is significantly higher at the moment than during the all-time high.
The main reason volume peaks during crashes is because a portion of traders are panic selling, while other traders are Dollar-Cost-Averaging (DCA) and accumulating in the crash. This causes the trade volume to explode above normal levels.
How Does Liquidity Affect Crypto Price?
Liquidity is a major contributing factor to volume because of the way it affects prices – and this is more evident on smaller coins.
It is estimated that Bitcoin has $200 billion worth of liquid assets backing its market cap (across all exchanges). The liquidity to market cap ratio is often 1:10 on most coins. For example, if we have a coin with $10 million in liquid backing, the market cap will roughly be $100 million, but some coins have more liquid backing.
Here’s the problem: If a big player sells a large percentage of the coins, draining the liquidity, this causes the volume to spike and the price to crash.
Case in point: Elon Musk recently sold off $2 billion worth of Bitcoin on the open market. The $2 billion sale caused a small dip that was less than 5% thanks to Bitcoin’s large liquid backing. Bitcoin corrected and recovered swiftly despite the multi-billion dollar sale.
If $2 billion worth of Solana (SOL) or Avalanche (AVAX) were sold, this could cause a catastrophic crash due to their smaller market cap and liquidity.
What Causes Volume Spikes?
Volume spikes due to price action in a cryptocurrency, but the root cause leading to the spike in volume varies by project and news cycle.
In the crypto industry, a project that receives good news such as a new partnership or an exchange listing will often experience a volume spike. If a new crypto launches and is listed on an exchange such as Phemex, it receives exposure from a new audience and that leads to a spike in trade activity & volume.
Conversely, if a project receives bad news this could also lead to a volume spike. The news that Tesla sold its Bitcoin holdings led to a small dip, not due to a lack of liquidity, but the bearish news itself. When the crypto industry learned that Tesla purchased Bitcoin last year, it led to a spike in Bitcoin trading volume.
Another factor–Bitcoin is currently traded on Wall Street and therefore has a strong correlation to the traditional financial markets and especially tech stocks listed on the NASDAQ. If the NASDAQ is in a bull run, this will likely reflect in the price of Bitcoin.
On most trading days, Bitcoin has an equal amount of buys and sells which keeps the price stable. When there is volatility in the financial markets, or news concerning Bitcoin breakouts, the volume immediately spikes. Traders have to be in tune with the latest news to capitalize on the price action.
What Are The Best Indicators To Measure Volume?
Measuring volume is essential to a successful trading strategy. If we’re betting that the price of Bitcoin or another crypto will go up or down, we must have volume data that indicates an inflow or outflow of liquidity is coming. This is because if the volume stays the same, the price will remain stable, and we won’t be able to profit on the % move.
As mentioned above, all charts on Phemex automatically have a volume indicator. However, if we want to access more advanced indicators, we can head to the “Indicators” bar at the top and use the search engine to locate the two best volume indicators: “On Balance Volume” and “Money Flow Index”.
On Balance Volume (OBV)
On Balance Volume is the most-used volume indicator aside from the regular volume indicator. The indicator is simple, without a fixed range, and measures the correlation between volume and price on the daily. However, long-term data should be disregarded because the calculation resets daily.
Money Flow Index (MFI)
Money Flow Index is a range-bound indicator between 0-100, making it a lot easier to read. While it is a volume-based indicator, it is interpreted similar to the Relative Strength Index (RSI) indicator, with upper boundaries signifying “Overbought” and lower boundaries signifying “Oversold” levels.
Money Flow Index (MFI) indicator on the Bitcoin daily chart.
The MFI indicator is used in reversal trading to identify support and resistance levels. If the indicator hits the upper boundaries, we can expect a correction. If it hits the lower boundaries, we can expect a price surge.
The current measurement on the indicator is 48, which indicates Bitcoin is neither overbought nor oversold and could go in either direction. The most likely direction for Bitcoin will be the direction of the financial market at large.
Conclusion
Volume is perhaps the most important metric for trading crypto regardless of whether we’re trading Bitcoin or an altcoin, as it allows us to measure the liquidity levels and price direction of crypto.
If we want to ensure we’ve invested in a quality project with a lot of liquidity, we should choose a crypto with a billion-dollar volume that will always have liquid backing. We also need to ensure the volume profile matches our trade direction to end up profitable – especially in leverage trading. Other indicators such as the OBV and MFI indicators can give us context for the relation between volume and price.
To learn more about technical indicators you can use for volume profiles, visit our technical analysis (TA) section.
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