Volume, Trading and Buying Cryptocurrency
Volume plays a crucial role in crypto trading and investment. A substantial trading volume typically results in more equitable and less volatile price changes. Conversely, low volume can lead to erratic price movements and create opportunities for manipulation, making it easier to execute pump-and-dump schemes.
Volume can be measured in various ways, including the total number of coins traded, the total dollar value of all trades, or the number of unique addresses involved in buying or selling a specific coin.
The interpretation of volume varies based on the calculation method. Let's delve into the different types of volume encountered in cryptocurrency trading!
What is the Volume in Crypto Trading?
The trading volume of a cryptocurrency is gauged by the number of coins or tokens exchanged within a specific period, often expressed as the daily quantity of coins traded. For instance, if 300 BTC and 400 BTC are traded on two exchanges on a particular day, the daily volume for Bitcoin would be 700.
Alternatively, volume can be measured by calculating the total dollar value of all trades in a given period, expressed as the daily total dollar value traded. Using the previous example, if the trades on two exchanges amount to $4,000 and $5,000, the total Bitcoin volume would be $9,000.
Another method of measuring volume is by considering the number of unique addresses involved in buying or selling a particular coin. This approach provides insights into the market diversity for the cryptocurrency and can indicate the dominance of large investors, often referred to as whales.
How to Measure Volume?
In the cryptocurrency realm, several volume indicators are employed, and each serves a unique purpose. There is no singular indicator. Instead, there are several and each has its distinct role.
Among the most popular volume indicators are:
- Total Volume Traded: The aggregate number of cryptocurrency units exchanged during a specific time frame.
- The Dollar Value of All Trades: The overall dollar value of all cryptocurrency trades occurring within a specified time frame.
- The Number of Unique Addresses Used: The count of unique addresses engaged in buying or selling a specific coin.
How Volume is Important in Crypto Trading and Cryptocurrency?
Cryptocurrency volume serves as a valuable indicator in assessing the strength of a specific market. A high volume suggests substantial interest in a coin, indicating active trading. Conversely, a low volume may indicate limited interest and infrequent trading.
The demand for a cryptocurrency is also gauged by the number of unique addresses involved in trading, with a higher number considered favorable. A market dominated by a few whales with low participation from other traders is generally not a positive sign. If small crypto exhibits significant daily trading volume but with a low number of unique addresses, it could raise concerns about potential scams.
Furthermore, crypto volume can provide insights into the price movement of an asset. A large volume often indicates significant interest, signaling potential price increases. Conversely, a small volume suggests diminished interest, predicting a potential price decline. Higher exchange volume tends to reduce market volatility, as it becomes more challenging for a single trader to influence price direction.
Additionally, cryptocurrency volume is commonly used to assess market liquidity. Liquidity reflects how easily a coin can be bought or sold. A market with high liquidity facilitates easy trading with minimal price discrepancies across different exchanges.
How to Use Volume in Buying Crypto?
All indicators serve distinct purposes, contributing to tasks such as measuring liquidity, predicting future asset prices, and identifying potential scams.
Traders utilize volume indicators for various purposes, including making decisions on when to buy or sell a specific coin. Some traders rely on volume indicators to confirm signals from other technical analyses. For instance, a trader might use a volume indicator to validate a breakout observed on a candlestick chart.
Certain indicators, like the on-balance volume (OBV), are employed to forecast future prices, functioning as momentum indicators. The OBV utilizes changes in a coin's trading volume to assess whether we can expect prices to rise or fall in the near future.
It's crucial to note that no single indicator is flawless. Volume indicators are most effective when used in conjunction with other technical indicators.
What about High and Low Volumes?
Elevated or High volume is generally positive as it signifies significant interest in a specific coin, often resulting in a price increase. However, high volume doesn't always guarantee upward price movement. During bear markets, increased volume may be driven by a rush of people selling off their assets. Nevertheless, heightened interest in a coin or token is advantageous for traders, attracting more potential buyers and sellers.
Conversely, low volume can be detrimental to a cryptocurrency, indicating a lack of interest that often leads to a price decrease. Yet, for traders, low volume can present opportunities as price movements become more pronounced. While this introduces higher risk, it also offers the potential for increased profit.
Is Faking Volume Possible in Crypto?
Yes, the manipulation of volume is feasible in the crypto market. This is commonly achieved through wash trading, where a trader repetitively buys and sells the same coin to fabricate the impression of elevated volume. While wash trading is deemed illegal in numerous markets, detection can be challenging.
Those involved in wash trading may go to the extent of using numerous unique addresses to conceal their activities.
Summary: Volume as an Indicator for Healthy Crypto Market
As we've discussed, the volume represents the quantity resulting from asset exchanges on the crypto market, measured by various indicators such as the total number of exchanged cryptocurrencies, those assets converted to USD equivalent, and others.
For successful crypto investors, volume stands out as a valuable indicator for assessing market swings and making informed decisions to buy or sell a cryptocurrency. Moreover, understanding the market size aids in identifying potential scam projects and steering clear of them.
It's crucial to emphasize that purchasing cryptocurrencies is a significant decision, and relying solely on one indicator, even a substantial one like volume, may not be advisable. It's important to leverage multiple tools or personal observations to ensure informed decision-making.