What Is Volume in Cryptocurrency?

Volume, also referred to as trading volume, is the number of tokens, contracts, or other units traded within a market over a specific time period. In the context of crypto trading, volume is generally used to refer to the total number of digital assets traded in a market over a time period such as an hour, day, week, or month.

Trades made on a cryptocurrency exchange are the result of the activity of market participants. Trades are executed between two parties — a buyer, and a seller. When a trade is executed within a market, the transaction is recorded by the exchange and used to calculate volume.

Volume is an important data point for cryptocurrency investors and traders. Analyzing volumes can give a trader or investor insight into price movements. Volume is not immutable — a high volume cryptocurrency can quickly become a low-volume cryptocurrency, and visa versa.

This article answers the question “what is volume in cryptocurrency,” and provides insight into how volume works in cryptocurrency markets, as well as guidance on how to interpret volume and some basic volume indicators you can use to gain insight from volume analysis.

Why is it important for traders?

Volume is an important indicator that provides cryptocurrency investors and traders with information that can be used to infer trends and quantify market sentiment.

Cryptocurrency traders analyze volume within cryptocurrency markets to gain an understanding of the strength of a market trend. A successful and accurate interpretation of volume can provide traders with an understanding of the driving factors behind price movement and, in some scenarios, help traders determine whether to buy or sell an asset.

Volume is important due to its quantifiable nature — unlike price level fluctuations, volume is a clear and concrete indicator of market interest. Experienced cryptocurrency traders and traders that use technical analysis to execute trading strategies often incorporate volume analysis into market analysis practices.

Volume is closely related to the volatility of a market. Price movement within crypto markets is driven by a variety of factors that include speculators, cryptocurrency miners, traders, recreational investors, and institutional investors — all of which hold differing opinions on any given asset. These differing market participants contribute to the volatility of digital asset markets.

While cryptocurrency markets are inherently volatile, however, digital assets with high trading volume and robust price discovery are typically less volatile than others. Observing the total volume traded over time for any digital asset will provide a trader or investor with perspective on how volatile an asset is  likely to be. A lack of volume may represent a lack of interest, while high volume may indicate high market interest.

Volume analysis is important when trading digital assets with lower liquidity. A trader may, for example, want to trade an asset that lacks significant volume and liquidity on the exchange they are trading on. Should the trader make a large market order in a low volume and illiquid market, the order matching algorithm will fill the order at the best price available, then complete the order with the next-best asset price available.

If there isn’t enough liquidity to complete a market order at the price expected by a trader, the market will fill the order with sequentially higher orders until the market is filled. This phenomenon, referred to as slippage, can have a significant impact on trading strategies. Volume is a critical metric used by traders to gauge market interest and identify market trends. Coindesk survey data published in 2018 reveals that 40% of crypto traders view volume as a fundamental metric essential to their trading practices.

Calculating The Volume of a Cryptocurrency

Understanding how to calculate cryptocurrency volume isn’t complicated — in order to calculate cryptocurrency volume, it’s necessary to determine a time period in which to calculate volume and measure the number of times an asset is traded within it.

The total amount of Bitcoin traded on a cryptocurrency exchange within the last 24 hours may, for example, amount to $10 billion worth of trades. The 24-hour Bitcoin volume for the exchange is, therefore, $10 billion.

Technical Analysis and Crypto Volume

Volume is a fundamental analysis object used in technical analysis, alongside price data. Volume analysis provides traders with insight into the power and intensity of price movements within a market, and therefore functions as a critical element of any comprehensive technical analysis practice.

Support and resistance level analysis, for example, provides a far greater deal of significance when paired with analysis of volume trends. Average volume patterns can confirm trends identified through technical analysis, or assist traders in identifying false trends. An asset may, for example, appear to demonstrate an uptrend, which can then be confirmed by a trader using volume analysis.

Volume Indicators

There are a number of important indicators that can be used to assess and chart volume. Volume indicators can be used to gain insight into price momentum, selling pressure, or identify overbought or undersold market conditions.

Incorporating volume data, such as local high information, trend line data, and other factors that contribute to the activity of a market into the following indicators can assist traders in creating trading strategies based on technical analysis.

On-Balance-Volume Indicator (OBV)

The on-balance volume indicator, or OBV, is one of the most widely used volume indicators. On-balance volume is a straightforward measurement of volume changes that can be correlated to price. OBV can also be used to determine divergence, which occurs when price movement is not confirmed by an indicator. Divergence may signal a potential reversal.

Calculating OBV is a relatively straightforward metric based on daily volume. Calculating on-balance volume is performed as a running total, which means it’s based on historical volume data in a cumulative total. There are three rules involved in calculating on-balance volume:

• Crypto markets don’t “close” in the same manner as traditional markets — OBV calculation is performed using a specific time on a daily basis. If the price of an asset remains the same across the initial measurement time and the ending measurement time, OBV remains the same.
• If the price of an asset is higher than the initial measurement, the OBV is equal to the previous period’s OBV plus daily volume.
• If the price of an asset is lower than the initial measurement, OBV is equal to the previous day’s OBV less daily volume.

Momentum Indicator

Volume functions as a strong indicator of market momentum. Increased buying volume will result in asset process — but in order for this to represent a trend, volume must be maintained. An asset that is increasing in price but losing volume, for example, could indicate a potential reversal and declining momentum. Inversely, an asset that is lowering in price on decreasing volume could also represent a potential direction shift.

Spikes & Exhaustion

Volume can be analyzed in order to determine market momentum using the above example. Volume spikes can be used to identify momentum changes in any direction, but can also be used to identify the end of market momentum — a scenario commonly referred to as exhaustion.

A significant spike in volume may, for example, indicate that late traders are buying into a significant market move during the peak of the movement, which can potentially exhaust sellers or buyers.

Money Flow Index (MFI)

Money flow index leverages volume data in order to provide traders with insight into whether a market is overbought or undersold, delivering similar insight to a relative strength index.

Money flow index is a range between 0 and 100, with higher MFI values indicating a potential price reversal. A MFI value of 80, for example, may suggest an impending price reversal due to high buying volume, while an MFT value of 20 may suggest an oversold market with high selling volume.

MFI can be used by traders to identify potential buy or sell opportunities.

Volume Price Trend

Volume price trend, or VPT, can be used to identify potential price direction changes and the strength of any potential change. VPT functions as a cumulative volume line that either subtracts or adds a specific multiple of percentage change in digital asset price trends and volume, and depends on either an uptrend or downtrend in asset price movement.

Volume price trend uses volume data to quantify the balance between supply and demand for an asset and uses both percentage change and volume data. Within VPT, asset price trend data indicates the relative demand or supply for an asset, while volume data represents the force behind the trend.

Can Volume be Faked in Crypto?

High trading volume in crypto markets are an indicator that an exchange has a large user base of traders, establishing an exchange as a trustworthy platform. For this reason, some digital asset exchange platforms may “fake” volume through a practice referred to as “wash trading.”

Wash trading involves placing buy and sell orders at the same time, resulting in immediate order fulfillment. While this practice doesn’t result in any material movement of digital assets, it contributes to volume. Wash trading can create the appearance of a high-volume market, but can have a significant detrimental impact on traders that use volume data as part of technical analysis.

Data published by digital asset market intelligence platform Messari indicates that many cryptocurrency exchanges within the digital asset market use wash trading and other practices to artificially boost volume.

Exchanges that inflate volume through practices such as wash trading may do so in order to attract new users. Wash trading can be performed in a number of different ways, such as through third-party traders working with exchanges, traders colluding with one another, or the use of automated high-frequency trading algorithms or bots.

High-frequency trading algorithms are used extensively within the digital asset market, and may account for a significant portion of artificially inflated volume.

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