What Is Volume in Cryptocurrency?

By Brian Nibley · December 18, 2021 · 6 minute read

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What Is Volume in Cryptocurrency?

Trading volume is a metric that investors use to see how often an asset is trading hands, indicating how popular it is to buy or sell that asset at any given time. Investors examine trading volume for a variety of securities, including stocks, bonds, and international currencies.

In cryptocurrency, in particular, trading volume is an important factor that traders use to determine the potential trajectory of a coin.

Recommended: Crypto 101: Crypto for Beginners

Crypto Trading Volume Meaning

Crypto trading volume measures how many times a coin changes hands over a given time frame. Investors analyze crypto volume baked on either trades taking place on a given crypto exchange or on all exchanges combined.

The most common timeframe for measuring volume is 24 hours, and the most common format used to show this metric is a bar chart. Typically when high volume cryptocurrency trading can mean an increase in prices and low volume cryptocurrency could indicate prices falling.

Calculating Cryptocurrency Volume

Calculating crypto trading volume requires determining the total value of a type of cryptocurrency that has changed hands in a given period. For example, if the total amount of bitcoin (BTC) traded on Binance in the last 24 hours added up to $10 billion, then the 24-hour trading volume of BTC on Binance was $10 billion.

Why Is Volume Important in Cryptocurrency?

Tracking cryptocurrency is particularly important when trading coins with low crypto liquidity on smaller exchanges, the importance of volume becomes apparent. Say a trader wants to sell one million SHIB coins, for example. But the hypothetical exchange she is using doesn’t have a lot of SHIB volume. To sell 1 M SHIB could require going through dozens of buy orders, each one being at a slightly lower price than the one before it.

This results in the trader receiving a lower price for her coins than she might have if the exchange had higher volumes (a phenomenon referred to as “slippage”). In extreme cases, there might not be any buy orders at all, and a trader would have to make new sell orders, hoping they get filled at some point.

Likewise, if someone wants to buy a coin with low volume, they could end up spending more money than they would have if trading volumes were higher. Having to buy up existing sell orders bids prices higher.

Higher volume tends to translate to higher price stability and less volatility. Of course, times of extreme fear or greed might bring surges in volume and large price movements. But, in general, coins or assets that consistently have higher volume tend to have less volatility.

What Does Cryptocurrency Volume Indicate?

Crypto trading volume indicates interest in a cryptocurrency. The more people are buying and selling something, the higher the volume, which can drive even more interest in that cryptocurrency.

Surges in trading volumes suggest either strongly bullish or strongly bearish sentiment. Meme coins like Dogecoin (DOGE) and Shiba Inu (SHIB) have enjoyed plenty of volume during their big market run-ups. Over time, interest in such coins tends to wane, and volume tapers off along with the price.

A high-volume cryptocurrency can become a low-volume cryptocurrency and vice versa.

Low trading volume means investors aren’t very interested in buying or selling a particular asset. There could be any number of reasons for this. When prices and trading volumes diverge, this can mean that prices aren’t telling the whole story.

Can Volume Be Faked in Crypto?

Yes, it’s possible to exchange volumes through a practice known as “wash trading.” This practice involves placing buy and sell orders at nearly the same time. The orders can cancel each other out and not result in any material movement of markets. This gives the appearance of an active market but is really just noise.

According to crypto research firm Messari , “it is well known that many exchanges conduct wash trading practices in order to inflate trading volume.”

The exchanges may believe that higher volume will entice traders into using their platform, and the more traders that use their platform the more money they make.

Wash trading can take place in several different ways, including:

•   A trader colluding with an exchange

•   A trader colluding with another trader

•   The use of high-frequency trading algorithms

In cryptocurrency markets, high-frequency trading (HFT) algorithms may account for much of the fake volume. These are basically computer bots that can make large numbers of trades very fast.

Concerns about fake volume on exchanges may be one reason that some traders prefer decentralized exchanges, on which it’s harder to fake volume.

Crypto by Volume

Coinmarketcap is a commonly cited source for crypto prices and trading volumes. But the site makes no distinction between exchanges that may have high amounts of wash trading and those that do not. Messari provides “real” volume data, gleaned from exchanges that they believe with a high degree of confidence do not engage in wash trading.

This distinction is important to make because when looking at volumes for different coins or exchanges, the results can be very different depending on the source.

On December 9, the top 5 crypto assets by 24hr trading volume according to Coinmarketcap were:

1.    Tether (USDT)

2.    Bitcoin (BTC)

3.    Ethereum (ETH)

4.    Binance USD (BUSD)

5.    XRP (XRP)

However, according to Messari, the top crypto assets by 24hr “real” trading volume were:

•   Bitcoin (BTC)

•   Ethereum (ETH)

•   USD Coin (USDC)

•   Tether (USDT)

These rankings show that the popular stablecoins USDC and USDT are among the top 5 coins by volume with or without alleged fake trading transactions.

Binance’s exchange token, BUSD, is fourth when including wash trades, but didn’t make the top five for real volume.

Bitcoin (BTC), the oldest and largest cryptocurrency, had volume of more than twice the next-highest volume coin.

Is Volume a Necessary Metric for Valuing Coins?

Many crypto traders see volume as the most important metric for valuing a cryptocurrency.

In 2018, nearly 40% of 39% of respondents to a Coindesk survey chose volume as the indicator they couldn’t live without. The main reason they gave was that other technical indicators rely on an individual’s ability to interpret charts, while volume is more objective.

When price and volume fall together, traders may believe that the market is exhausted and will reverse course soon. On the other hand, when price rises and volume falls, investors often see that as a bearish sign that means prices will pull back soon.

The Coindesk survey quoted one trader as saying that trading volume “speaks to the sincerity of price action.” In other words, the movement of prices alone can be deceiving. When factoring in volume, it can be easier to get a more comprehensive view of how the market is behaving.

The Takeaway

Cryptocurrency volume trading is a measure of how many cryptocurrency transactions are taking place. Much of what’s been covered here also applies to volume in stocks, although there are more regulations around wash trading in equities.

Photo credit: iStock/hsyncoban

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.


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