What Does Volume Mean in Cryptocurrency: Understanding the Importance of Volume Analysis for Trading

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What does volume mean in cryptocurrency? Volume is the amount that can be occupied within a limited space. However, in the context of financial markets and cryptocurrencies, volume represents something entirely different.

Volume is the term used to describe the total activity within a particular market, a tradeable market to be precise. For example, the total volume on the S&P 500 mini contract, a tradeable asset of the index representing the 500 most valuable US companies, currently stands at around 1,250,000 contracts.

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This means a total of 1,250,000 contracts were traded on a specific day on a particular exchange. If you multiply the total volume with the exact value of the index, you will get the total value of the transactions that took place or the total volume.

In the context of bitcoin, it represents the total amount of transactions that took place in the form of USD as well as BTC. For example, on Bitfinex, a popular cryptocurrency exchange, BTCUSD pair had a volume of $307,186,000 in a 24-hour period. If you divide the amount with the price of bitcoin, you would get the total volume in terms of BTC.

What Does Volume Mean in Cryptocurrency

So why are we talking about cryptocurrency volume? The total volume of a tradeable asset plays an important role as an analytical metric for investors and traders. It helps traders understand the depth of the market and the general interest in a particular market.

Let’s go over some of the ways volume is used by traders in the financial markets to make key financial decisions.

Depth of Market

The most basic use of volume analysis is to gauge the depth of a market. If an investor intends to sell a million dollars worth of bitcoin on a publically traded exchange, they would need to understand if there are enough buyers to absorb the increased influx of new bitcoins on the market.

Since price is determined by market forces, i.e., demand and supply, increased selling on the market will artificially and temporarily depress the price of an asset. So if our investor wished to sell a million dollars worth of bitcoin on an exchange which has an average buying volume of $500,000 they would be forced to lower their price to attract new buyers otherwise their sell orders would not be executed.

A sell order for $1,000,000 would get partially executed for let’s say $300,000. After that, there would no longer be any buyers left at that price level. If more sellers come into the market, they would have to sell their bitcoins at a lower price in order to get their sell order executed before the huge $700,000 pending sell order. So then the investor would have to further lower the price in order to sell more bitcoins.

The seller of one million worth of bitcoin would end up getting an undesirable average selling price due to a lack of liquidity or volume in the market. And since the price was artificially depressed by a single seller, the second all of the million dollars worth of bitcoins are sold, buyers would flood into the market to take advantage of the artificially low price until the price reaches the equilibrium price or the price before the large seller came into the market.

This is why it is important for traders and investors to understand the depth of the market by analyzing the trading volumes on an exchange.

Directional Momentum

Volume analysis is used for more than just understanding the depth of a market. In fact, most short-term traders analyze transaction volume in order to gauge the strength of a market’s directional momentum.

You must have heard that at times there are directional trends in the market, where the price continuously trends in one direction over long periods of time. In such cases, you can get insights into the strength of a trend or its momentum by analyzing the pattern of transactional volumes over that period of time.

Generally speaking, when market trends are losing momentum you can clearly identify them in advance and expect a reversal in the market. Of course, volume analysis cannot be used to predict the exact moment when a price reversal occurs. But it certainly helps to be aware of weakening momentum. This way you can lighten your position size and be ready to sell off your entire position at the first signs of a market reversal.

Volume-Profile Analysis

Another way to use transaction volume to understand the markets is through something called volume profile. Instead of analyzing volume in terms of time, you analyze total volume in terms of price.

Let’s simplify that a bit. Most people look at volume in terms of time—meaning, the total transaction taken place over a period of time. A novel approach is to look at volume in terms of price levels. For example, how many transactions took place when bitcoin was trading around a price range of $17,800 and $18,200.

It doesn’t matter if a transaction took place a day from now or a month from now. If a transaction took place within the price range, you would want to know. This is a great way to isolate ranges of interest in the market ranges were traders might find the price attractive to buy into a falling market or sell into a rising market.

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As you can see, the article got a bit technical, didn’t it? Well, to be honest, it is extremely difficult to explain these concepts without getting a bit technical. Trading is not an easy job. You have to dedicate considerable time and effort to learn various different methodologies for market analysis and trading.

This is why it is especially important to properly learn market analysis and trading. Crypto Investing Pro is a cryptocurrency course that not only helps you understand the basics of cryptocurrencies but also helps you understand how to analyze and trade markets.

There are a number of different approaches you can use to trade for a living. However, it is important that you learn each of them and master the one that works for you. But for something like this, you need a knowledgeable teacher and a structured learning environment. Crypto Investing Pro provides exactly that and more. It will even help you understand questions like what does volume mean in cryptocurrency?

Conclusion

If you’ve ever read the Market Wizards series by Jack D. Schwager, you will know that there is no one right way to make money in the markets. There are thousands of successful traders doing different things, things that run counter to conventional wisdom and still make consistent returns over long periods of time.

The point is that you need to be knowledgeable in the field to be successful over the long haul. Market volume analysis is just one small aspect of market analysis. It is an important aspect of market analysis, but in isolation, it is useless as a way to profitably trade. Learn all aspects of the markets before you invest any of your hard-earned money.

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