Why Is Volume Important When Trading Cryptocurrencies?

“Volume” is one of the most frequently discussed metrics around crypto trading. Whether predicting market movements or identifying legitimate popularity, volume can say as much about a crypto’s prospects as its actual price.

In this article, we will identify what exactly volume is, and how it’s relevant to cryptocurrency. Then, we’ll study some limitations of the metric.

What is Crypto Trading Volume?

Volume represents how much of a cryptocurrency has been traded within a specific time period. For example, Crypto Adventure’s live price index shows the 24-hour trading volume for all the top digital assets. Other indexes often present a 7-day trading volume as well. Dollars are used as the unit of account for an accurate, comparative measure of value being exchanged across various assets.

This may sound similar to “liquidity”, but these metrics aren’t the same. For example, volume is the sum of actual trades taking place. However, liquidity is simply the amount available for trade at any specific price. Volume and liquidity tend to correlate.

Calculating Trading Volume

You can calculate trading volume differently depending on where you look. CoinMarketCap calculates “the total spot trading volume reported by all exchanges over the last 24 hours for that crypto asset.” CryptoAdventure’s calculator works in a similar way, but tracks activity across a greater number of exchanges than CoinMarketCap.

There are pros and cons to each method. Indexes that track activity on fewer exchanges account for less of the market’s trading activity. Conversely, counting every available exchange risks including non-credible data. After all, some smaller and unregulated exchanges may use wash-trading to create the illusion of activity on their platform. For instance, the CEO of the Canadian Crypto exchange “CoinSquare” was found wash-trading $5.5 billion in Bitcoin last year.

With that said, various indexes may report vastly different trading volumes for specific cryptos. At the time of writing, CryptoAdventure finds about $80 billion worth of Bitcoin traded over the last 24 hours, whereas CoinMarketCap reports only $34 billion. As a trader, it’s important to diversify your research for this metric to most accurately analyze the market.

Usefulness For Crypto Trading

This metric helps predict the direction and movement of a cryptocurrency, and is an effective indicator of its current demand. As such, it helps traders predict the profitability of specific cryptos – especially in the short term. In fact, a CoinDesk poll in 2018 showed that trading volume was the most valued crypto market indicator among traders.

Higher trading volumes in the market lead to fair, non-distorted prices. Meanwhile, lower trading volume means that buyers and sellers cannot find an agreeable settlement price. This can help create great arbitrage opportunities between low-volume and high-volume exchanges.

More importantly, however, it helps traders identify points of resistance in the markets. Professional traders maintain that a crypto’s price and volume falling together could drain the markets. Therefore, a reversal may happen soon. Alternatively, if prices are rising but volumes are falling, that can be bad news for bulls.

As TheCryptoDog – a twitter crypto market commentator – puts it: “Volume speaks to the sincerity of the price it is tied to”.

Matt Thompson – Director of Business Development and Operations at Coinigy – sees volume as an imperative trading metric.

“Volume is hands down the most important aspect outside of price… Even for many other technical indicators, volume can serve as confirmation or rejection of a given hypothesis,” he said.

Limitations of Trading Volume

Though volume is a handy metric, it does have its faults. As mentioned, wash trading can skew this metric as measured across various exchanges. Another method is “spoof trading”, whereby traders list orders on exchanges, but withdraw them before they fulfill. This can increase “trade volume” without actually resulting in a real trade.

Josh Rager – a chart analyst – said he believes Bitcoin is unique from other cryptocurrencies in this regard. He said it has far more true liquidity.

However, trading volume can poorly represent Bitcoin for different reasons. Nicholas Mertin of DataDash has stated that volume traded on exchanges doesn’t capture the primary crypto’s volume as effectively:

“There is an equal amount, if not larger amount of volume on OTC markets for Bitcoin than there is on the actual retail exchanges. Volume on exchanges can lead towards very large misconceptions if there’s a lot of volume going on off exchange.”


Bitcoin live price
price change

As explained, trading volume can be an incredibly useful guide when analyzing the crypto market. High volumes generally represent accurate prices, whereas low volumes mean price could change. The calculation of volume can vary drastically depending on who is doing the measuring. So, diversifying sources here is key. Finally, volume may be a less accurate metric for large-cap cryptocurrencies. And, the latter see much of their trade done off of exchanges.

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