What Is A Trading Volume In Cryptocurrency?

Understanding trading volume is crucial for traders when buying or selling crypto assets. This indicator serves as a vital tool for estimating value and, later on, making a profit. In this article, we will explain in more detail why trading volume matters and what factors influence it.

What Is A Trading Volume?

Trading volume is the total number of purchases and sales of a particular crypto coin over a certain period, usually 24 hours. For example, if the daily trading volume of Solana reaches 4 billion, traders exchange 4 billion SOLs within a single day. It shows how popular a project is and whether you should invest in it.

Why Crypto Trading Volume Matters?

Trading volume matters because it reflects public interest and determines the potential direction of the coin. It provides insight into the activity of a specific asset or the market as a whole.

For example, a high trading volume in crypto indicates a large number of buyers and sellers, making an asset more liquid. This means that users can easily trade coins without significant price fluctuations. As a rule, a trading volume tends to rise with the price of the asset. For example, at the end of July 2021, the value of Ethereum reached $2,300, with trading volume hitting $6.8 billion. Thus, the high level of trading volume contributes to the growth of the value of cryptocurrency and signals about the “health” of a coin.

In contrast, low crypto trading volume means that investors may lack interest in the asset. It also suggests low liquidity, which makes transactions difficult and leads to higher volatility. In many cases, a DeFi project with a small trading volume is a red flag, as the coin may be “dead” despite a high nominal market cap, as was the case with CUDOS. In some instances, exchanges even delist assets due to insufficient trading volume.

Factors That Impact Trading Volume

The crypto market is highly volatile and similar to a living organism that reacts acutely to external events. Let’s examine in detail the factors that affect the trading volume:

1. Market trends: bull and bear tendencies. During bull market periods, prices rise, and investors actively buy coins, which increases trading volume due to the massive influx of new participants.

On the other hand, a bear market is when prices are falling due to panic selling of assets. Here, trading volume can also rise due to an increased number of sell orders. However, during prolonged bear phases, the volume gradually decreases as interest in trading drops, as with Aragon (ANT). During its growth, the trading volume increased and there was a sharp fall in September.

2. News and events: one of the most powerful drivers of trading volume. They have vastly different outcomes. So, positive news that can increase trading volume includes listings on major exchanges, project upgrades (like Ethereum 2.0), and the adoption of cryptocurrencies at a government level. One more example is dogwifhat, a meme token whose appearance on DEX platforms in 2023 led to an increase in trading volume and interest among the crypto community.

Negative news that can reduce trading volume include hacker attacks, sanctions and tightening of crypto laws, and scandals.

3. Liquidity: it means users quickly trade assets without significant price changes. DeFi projects with high liquidity (such as Bitcoin and Ethereum) tend to have large trading volumes because they are easy to buy and sell. On the other hand, rare or lesser-known tokens, such as Shiden Network (SDN) or Umee (UMEE), often have low trading volumes due to their limited accessibility and are harder to sell. In such markets, transactions can cause significant price fluctuations, making them less attractive to traders.

Thus, news, market trends, and liquidity are interrelated factors that affect trading volume. News creates interest, trends increase trading activity, and liquidity determines how easily trades can be executed. Together, they set the direction of the market.

What To Consider While Analyzing Trading Volume?

Analyzing trading volume in cryptocurrencies requires consideration of factors that help understand how relevant the volume data is and what conclusions can be drawn.

Firstly, trading volume on the market depends on the chosen time frame. For example, daily volume helps identify short-term trends, while weekly or monthly volume reflects more stable long-term patterns. In the analysis, it is important to take into account not only time intervals but also the peculiarities of market hours and trader behavior, as the activity may spike on certain days of the week or during major news events.

Secondly, trading volume is often influenced by large investors, the so-called crypto whales. Their actions can significantly distort the real state of the market as they make one-time large transactions. Such transfers, in turn, can temporarily inflate volume without indicating stable, ongoing activity. Therefore, it is essential to use analytical platforms to track large capital movements, including blockchain data.

Trading volume is a key factor to consider when purchasing a digital asset. Analyze the market, stay informed about external events and news to properly track the mood of the asset, and maximize potential profits. Follow the actual news and study the market you always can in the Cryptomus blog.

How often do you pay attention to cryptocurrency trading volume? Share it in the comments.