Trading volume is seen as a key metric for evaluating the price of a cryptocurrency by day traders. Trading volume tracks the total amount of crypto that is being traded across all exchanges – centralized (CEX) and decentralized (DEX) exchanges – and gives investors an idea of its market performance.
In this article, we will provide you with an overview of what trading volumes in crypto signifies, how it affects crypto prices, how to research crypto volumes, and the best indicators for volume trading.
So, let’s dive right in.
What Is Trading Volume In Cryptocurrency?
Trading volume measures the number of times a crypto token has changed hands over a certain time period. Investors often refer to this metric to see how valuable an asset is to buy or sell at any given time.
It can be defined as the sum of all trading for a particular coin on both centralized and decentralized crypto exchanges, measured in US dollar value. Generally, the higher the trading volume, the higher the price volatility of the asset, and vice versa.
The typical timeframe for measuring crypto trading volume is 24 hours.
What Does Crypto Trading Volume Indicate?
Cryptocurrency trading volume indicates the market’s interest in a particular crypto asset. The more people selling and buying crypto, the greater its trading volume. This can drive even more interest in that particular crypto and increase its price.
Whereas, low trading volume implies that investors may not be really interested in buying or selling an asset, which could drive down its prices.
What Is The Significance Of Trading Volume In Crypto?
When the trading volume of a cryptocurrency is higher, its prices tend to be fairer and also reduce distortion. It also translates to higher market stability and liquidity for the particular token.
On the other hand, a low trading volume could signal a lack of market interest for the token because the asking price of sellers fails to meet the expected bids of potential buyers. This can be a potential red flag for the token. The worst-case scenario would be exchanges deciding to delist the token because it gained zero traction.
The total amount of times a token changes hands indicates the market sentiment towards it and also its popularity among investors. Traders would normally examine a token’s volume by a week, 24 hours, or even 30 days. These results will help you identify whether a token’s price fluctuations are normal or point to a major decline or price breakout.
What Can You Understand From Crypto Trading Volume?
Cryptocurrencies that frequently experience heavy price moves will naturally garner less attention when there is a high trading volume. However, if a token with generally low trading volume suddenly experiences hefty trading volume over 24 hours, then it could indicate some major market event or large holders making a strong move for it.
What Are The Best Indicators To Measure Crypto Trading Volume?
Measuring the exchange trading volume of a cryptocurrency is an essential part of a successful trading strategy. If you were to bet on the price of a token, then you must have volume data indicating that an inflow or outflow is coming to the market.
Here are a couple of indicators that can be used to access more advanced information regarding a token’s trading volume:
- On Balance Volume (OBV)
OBV is one of the most commonly used indicators aside from the regular trading volume indicator. On Balance Volume measures the correlation between volume and price on the token’s daily chart.
However, OBV is not suitable for collecting long-term trading volume data because the calculation is reset on a daily basis.
- Money Flow Index (MFI)
This range-bound indicator between 0-100 is interpreted like the Relative Strength Index (RSI), with the upper boundaries signifying “Overbought” and lower boundaries signifying “Oversold” positions.
The MFI indicator is used to identify the support and resistance levels of a crypto token. If the indicator hits the upper level, then we can expect a price correction. And if it hits the lower boundary, then we can expect a price surge.
Trading volume is an essential metric that is used for assessing the health of a particular cryptocurrency. Traders and market analysts always tend to examine the trading volume of a token besides other metrics like circulating supply and market capitalization when identifying assets in their early stages that have high growth potential.