Exploding Topics reports that there are more than 50,000 confirmed Bitcoin transactions every day.
Investing in cryptocurrency can be daunting due to the sheer number of metrics and indicators available to investors today. One of the most crucial yet often underappreciated metrics is volume in cryptocurrency. But why is volume so vital, and how can you use it effectively to guide your investment decisions?
Keep reading to find out.
What is Volume in Cryptocurrency?
In simplest terms, volume refers to the total number of cryptocurrencies exchanged between buyers and sellers during a particular period. This period might range from one hour to one week and is usually depicted on a bar chart beneath the price chart of the asset. Higher bars indicate higher trading volumes, while shorter bars illustrate lower trading volumes.
It represents the total amount of a cryptocurrency that has been traded over a specified time period. It’s a reflection of an asset’s liquidity, indicating how easy or difficult it is to buy or sell a cryptocurrency at stable prices. Volume offers a glimpse into the market’s underlying strength or weakness based on the trading activity of the asset.
Why Volume Matters
Volume serves as a gauge for the health and market sentiment regarding particular assets. When volume is high, it indicates strong investor interest and robust liquidity, meaning you can buy or sell large quantities without significantly affecting the price. Conversely, low volume might suggest indifference in the market, or that the asset is experiencing reduced liquidity.
Volume helps investors confirm trends. For instance, if the price of a cryptocurrency is rising alongside increasing volume, it suggests growing momentum and can indicate that the price movement is likely genuine. Conversely, if the price rises on low volume, it might be a false flag, and the rally may not sustain.
How to Analyze Volume in Cryptocurrency
Crypto trading is complicated. Educating yourself will give you an edge, so learning how to analyze trading volume is key.
Volume Trend Analysis
Understanding volume trends involves looking at historical data to evaluate if the asset’s trading volume is increasing, decreasing, or remaining constant over time. A consistent increase might indicate a bullish trend, whereas a steady decline could suggest a bearish outlook.
Volume and Volatility
Volume is often linked with market volatility. A surge in volume may suggest upcoming volatility, as increased trading typically occurs around market events or news announcements.
Using Volume in Technical Analysis
Volume is a key component in many technical analysis tools and indicators. Here are a few examples of how it’s used:
- Volume Weighted Average Price (VWAP): VWAP provides insight into market direction and can help determine if the price is trading above or below the average value.
- On-balance volume (OBV): This momentum indicator uses volume flow to predict price changes. When OBV rises, it signifies buyers are willing to step in at higher prices.
- Accumulation/distribution Line: This tool assesses the cumulative flow of money in and out of a security, suggesting whether the asset is being accumulated or distributed.
Evaluating Market Entry and Exit Points Using Volume
Volume can be particularly useful in deciding when to enter or exit positions. A surge in volume accompanying a breakout might signal a robust move, presenting an ideal entry point. Conversely, if an asset is approaching its peak with decreasing volume, it might be prudent to exit ahead of a potential downturn.
Case Studies: Volume in Action
Studying the past can help you gain better insights. Consider the impact that changes in volume have had in the past so you can be better prepared for the future.
Bitcoin’s 2017 Bull Run
To truly illustrate the importance of volume, consider Bitcoin during its meteoric rise in 2017. Trading volume surged concurrently with price, reinforcing the strength of the bullish trend. This synchronization between volume and price served as a confirmation for investors, convincing many to enter the market or increase their holdings.
Flash Crashes
Volume also helps during abrupt market downturns known as flash crashes. In these scenarios, volume often spikes sharply, allowing savvy investors to take advantage of panic selling to build positions at lower prices. Understanding these nuances can prevent hasty decisions during periods of volatility.
Strategies for Utilizing Volume in Your Investments
Successful trading is all about effective strategies. Consider your goals to figure out what techniques would be most suitable for you.
- Risk management: Use volume to assess risk by ensuring that assets being considered have adequate liquidity, bearing in mind that higher volume equates to more reliable price stability and easier trade execution.
- Identifying market trends: Analyze volume patterns to determine if current market behavior has the resilience to continue, or if key reversals may be looming.
- Setting price targets: Confirm price targets or chart patterns like head and shoulders, triangles, or rectangles with corresponding volume trends to validate breakout points.
Achieving Success in the Crypto Space
Understanding volume in cryptocurrency is essential for any investor looking to make informed decisions. From validating price trends to identifying potential market entry and exit points, volume offers invaluable insights into the market’s dynamics. However, it’s crucial to remember that volume is just one part of the broader spectrum of technical analysis tools and should be used in conjunction with other indicators to enhance trading strategies effectively.
Understanding and leveraging the power of volume can help investors navigate the often complex and volatile world of cryptocurrencies, providing a more comprehensive view of the market’s current state and aiding in more informed decision-making. By actively monitoring trading volumes, you can strengthen your portfolio management and trading approach, potentially increasing your chances of success in this volatile yet exciting financial landscape.
If you’re wondering about the best places to buy crypto, take a look at our guide on the top exchanges in 2025.