Understanding Cryptocurrency Trading Volume

Trading volume is one of the most important metrics to understand in the crypto trading game. It measures the total amount of a cryptocurrency that is bought and sold across exchanges during a given time period, usually 24 hours.

High trading volume typically signals interest and activity in a cryptocurrency, while low trading volume can indicate lack of interest. In this comprehensive beginner’s guide, we’ll cover everything you need to know about crypto trading volume, how to analyze it, and why it matters for your trading strategy.

What is Trading Volume?

Trading volume refers to the total number of units of a cryptocurrency that have been traded during a certain time period. It is commonly measured in the last 24 hours. For example, if 1 million units of Bitcoin have been traded in the past day across all exchanges, Bitcoin’s 24-hour trading volume is 1 million.

Trading volume shows the overall level of interest and activity in a cryptocurrency. It indicates how much of a cryptocurrency is being bought and sold by traders, investors, and market makers on exchanges. Cryptocurrencies with higher trading volume tend to be more liquid – it’s easier to buy and sell them without causing major price movements.

One step back – more on what is cryptocurrency trading – here.

Why Crypto Trading Volume Matters

Analyzing trading volume levels can give you important insights into the overall health and market dynamics of a cryptocurrency. Here are some of the key reasons why trading volume matters:

• Liquidity – High trading volumes mean there is significant interest in trading the cryptocurrency, lots of market participants, and good liquidity. This makes it easy to enter and exit positions when you want. Low trading volumes indicate low liquidity and your trades can have more price impact.
• Volatility – Cryptocurrencies with higher trading volume tend to be less volatile in price. Rises and falls in price impact the overall market less. Low volume cryptos can be moved more by individual trades, so are generally more volatile.
• Trader confidence – Seeing increasing trading volumes over time typically means traders are gaining confidence in the cryptocurrency and there is growing activity. Declining volumes could signal lack of trader confidence.
• Accuracy of technical analysis – Volume is a key component of technical analysis. Accurate technical analysis is much more difficult on low volume cryptos where price changes may not reflect true market dynamics.
• Stability – Cryptocurrencies with greater trading volume and liquidity tend to be more mature and stable. They are less prone to dramatic price swings and ‘pump and dump’ schemes.

Paying attention to trading volumes enables you to make smarter trading decisions and avoid assets that lack adequate liquidity or are vulnerable to manipulation.

How Trading Volume is Measured

Trading volume is quantified based on the total number of units traded of a cryptocurrency over a defined time period. The main metrics used are:

• 24-hour trading volume – The total units traded in the last 24 hours. This is the most commonly cited volume metric in the crypto space.
• 30-day trading volume – Total volume over the preceding 30 days. Gives a longer-term view of trading activity.
• Peak trading volume – The all-time highest daily trading volume for a cryptocurrency. Indicates the maximum interest and liquidity levels.

Trading volume is generally quoted in currency units (e.g. Bitcoin volume in BTC) or EUR value. Keep in mind that crypto trading is a global 24/7 market across many exchanges. Trading volumes on different data sites may vary slightly.

Check our full list of tested crypto exchanges.

Analyzing and Comparing Trading Volumes

When looking at any cryptocurrency, it’s useful to analyze and compare its trading volume using the following approaches:

• Volume over time – Look at trading volume trends over weeks and months. Is volume increasing, indicating growing activity? Or decreasing?
• Volume relative to market cap – Compare volume to the total market cap of the cryptocurrency. High volume-to-market cap ratios signal strong trading activity.
• Volume across exchanges – Look at volume on the major exchanges like Binance, Bybit and Bitget. Is most volume concentrated on one exchange or spread across many?
• Volume relative to peers – Compare the 24-hour volume to peer cryptocurrencies in the same category or market cap range. How does its volume rank?
• Volume relative to history – Compare the current volume to historical peaks and troughs. Is it near all-time highs or lows?

Let’s walk through an example analysis for Bitcoin:

• 24-hour volume: $41.2 billion
• 30-day volume: $898.7 billion
• Market cap: $575 billion
• 24h volume/market cap: 7.2%
• Rank by volume: #1

This data shows Bitcoin has very high trading volumes compared to peers. Volumes represent over 7% of total Bitcoin market cap. Historical and relative volume are also near all-time highs, indicating strong current interest in trading Bitcoin.

Using this combination of volume metrics and comparisons, we can get a complete picture of trading activity.

Important Factors for Major Exchanges

When comparing exchanges it’s important to look at factors like:

• Liquidity – Volume and liquidity levels for the currencies you want to trade
• Supported countries – Geographic location and supported fiat currencies
• Fees – Trading fees, deposit/withdrawal fees, currency conversion rates
• Security – Safety of funds, security and storage practices
• Ease of use – User experience levels and beginner-friendliness
• Available cryptocurrencies – Breadth of supported crypto assets
• Advanced trading options – Margin trading, options, futures, staking services
• Regulation and compliance – Whether the exchange is regulated and follows Know-Your-Customer (KYC) and Anti-Money Laundering (AML) rules.

Comparing fees, liquidity, ease of use, security practices and geographic support for your location allows you to choose the optimal exchange for your trading needs.

Reading Crypto Exchange Volume Charts

All major crypto exchanges provide live charts of trading volume activity over time. These can provide valuable insights into market dynamics.

Below is an example 24-hour volume chart from Binance for the BTC/USDT trading pair:

Key elements to note:

• Candlestick chart showing volume totals for each 1-hour time period
• Green candles indicate volume increase vs. prior hour, red candles indicate decrease
• Peaks show highest volume hours, valleys lowest volume hours
• Hovering over a candle shows exact trading volume for that hour
• 24-hour total volume shown above the sticks on the left

Watching 1-hour and daily charts can clearly show when trading volumes are surging or plummeting. This helps identify market cycles and changing sentiment.

Trustworthy Sources of Trading Volume Data

Given the importance of trading volume, it’s good to use accurate and trusted data sources. Some of the best sites include:

• CoinMarketCap – The most popular cryptocurrency market data site. Reliable for checking volumes on all major exchanges across hundreds of coins.
• CoinGecko – Similar to CoinMarketCap with a comprehensive market overview. Also aggregates volume from many exchanges.
• CryptoCompare – Leading market data provider, especially strong on exchange data and indices. Offers detailed volume charts.
• TradingView – Excellent charting and trading platform with detailed volume data on major exchanges.
• CoinCodex – Volumes for top cryptos and exchanges along with price, market cap, Github analysis and other metrics.
• Messari – Respected crypto research and data analysis site. Detailed volume profiles on major assets.

Using a combination of tools gives the clearest picture of trading activity across different exchanges and cryptocurrencies.

Impact of Crypto Market Cycles

Cryptocurrency trading volume is closely linked to market cycles and investor sentiment. Volume typically increases during the growth and peak phases of a market cycle, but declines when the market is contracting.

During a bull market with rising prices, trading activity surges as more participants enter trying to profit from the uptrend. This is also when new money tends to enter the crypto space.

In a bear market as prices fall, many traders and speculators exit positions, resulting in declining volumes across crypto assets. However bear markets also shake out weaker projects, allowing strong assets to consolidate their positions.

Analyzing volume levels can indicate where the market may be within its current cycle. For example, consistently increasing volumes signal accumulation and growth, while decreasing volumes over weeks can mean distribution and contraction. Being aware of these cycles is key for any crypto trader.

Cryptocurrency Correlations and Volume

Due to the interconnected nature of the crypto market, trading volumes across many major cryptocurrencies are highly correlated. When volume surges for one large crypto asset like Bitcoin or Ethereum, it typically increases across the board.

Correlations are not always positive though. For example, during periods of increased volatility and uncertainty, trading volume may rapidly increase for stablecoins like USDT, USDC and DAI as traders move funds off of exchanges temporarily.

Understanding these correlations allows you to better interpret wider market moves. If BTC trading volume is surging but your altcoin volume is lagging, it could signal weakness. Analyzing volume across both large and small cap cryptocurrencies gives key insights.

Effect of Significant News Events

Major news events related to cryptocurrencies often produce a spike in trading volumes as speculators react to the news. The extent of the volume increase depends on the significance of the event.

Examples of developments that can impact volumes include:

• Exchange listings – Assets newly listed on major exchanges almost always see a temporary volume surge
• Protocol upgrades – Ethereum volumes increased before each major upgrade like ‘The Merge’.
• Partnership announcements – Collaboration with a large brand/company generates interest.
• Major company purchases – Institutions revealing large crypto purchases, like Tesla buying Bitcoin.
• Regulatory changes – Impending bans or approvals related to crypto trading or ownership.
• Interest rate decisions – Volume often rises around major central bank decisions.

Staying updated on significant events allows you to better understand and trade around resulting volume fluctuations.

Warning Signs of Artificial Volume Metrics

While trading volume is important, it’s vital to recognize that some volume may be artificially inflated or fabricated by exchanges and projects. This is known as wash trading. Warning signs include:

• Volume inconsistent with market cap or user base – Assets with huge volumes but low market caps and user bases may be fabricating activity.
• Volume changes not aligned with price moves – Prices and volumes normally trend together. If they diverge, it could indicate manipulation.
• High volume concentration on lesser-known exchanges – Wash trading typically occurs on smaller exchanges.
• High volumes during periods of market contraction – Authentic volumes usually decline in bear markets along with prices. Spikes may be suspicious.
• Repeated volume pump and dumps – Assets whose volumes spike and crash in repeating cycles could be subject to manipulation schemes.

While wash trading is hard to definitively prove, being aware of these warning signs allows you to avoid assets and exchanges where volumes may not represent true activity.

How to Utilize Volume Data

In summary, analyzing trading volumes provides invaluable signals about market sentiment, liquidity, stage of the market cycle, strength of uptrends and downtrends, and potential manipulation.

Here are some final tips for effectively utilizing volume data in your trading:

• View volumes on 1-hour intervals to see how intraday volume shifts
• Compare volumes and movements to historical averages for that asset
• Monitor volume surges on Breaking News and upcoming events
• Be wary of low volume rallies and high volume selloffs
• Look for increasing volumes with upward trends, declining volumes in downtrends
• Use volumes to confirm or invalidate price chart patterns
• Be skeptical of projects with volume inconsistencies or spikes

While there are many complexities to cryptocurrency trading, analyzing volume charts provides one of the simplest ways to quickly gauge market dynamics. Combine volume with other metrics and indicators to make smarter trades.

Before you move on…

Don’t miss out on further enriching your trading knowledge.

Check out these related resources to take your crypto trading game to the next level:

• Crypto Trading Pairs: Understand how different cryptocurrencies interact and how to maximize profits through effective pair trading.
• Cryptocurrency Trading Timing: Learn the art of timing your trades to capture the best trading opportunities.
• Trading Platforms: Confused about which platform to use? We’ve done the work for you.