Introduction to Crypto Trading Volume and How to Interpret It

Among the fluctuating numbers of crypto prices on the screen, one key metric holds a wealth of hidden secrets: trading volume. Understanding volume in crypto trading is like decoding the chatter of that lively marketplace – it reveals the real story behind price movements and market trends. 

Read below to find out how you should interpret crypto trading volume and uncover what it really tells you about the market.

What is Volume in Cryptocurrency Markets?

Volume in cryptocurrency trading refers to the total amount of a specific cryptocurrency traded over a given period, usually expressed in terms of units of the cryptocurrency or the equivalent in a fiat currency (e.g., 10,000 Bitcoins (BTC) traded in a day, the volume for BTC on that day is 10,000 BTC).

Why is Volume Important?

Volume is a direct reflection of market activity. High trading volumes indicate a robust market with a significant number of participants engaging in transactions. Conversely, low trading volumes may suggest a lack of interest or a stagnant market environment. 

Understanding volume can help you gauge the strength behind price movements; for instance, a price increase accompanied by high volume is generally viewed as a strong, bullish signal.

Overall, volume is a fundamental indicator for:

  • Liquidity – high volume indicates high liquidity, meaning it's easier to buy or sell the asset without causing significant price changes.
  • Price trends – volume helps confirm price trends; a price movement (up or down) with high volume is more likely to be sustainable than one with low volume.
  • Market sentiment – volume can reflect the market's interest in a particular cryptocurrency, providing insights into investor sentiment.

Interpreting Volume in Crypto Trading

You can interpret volume data in various ways, but one of the most common methods is through volume indicators. These tools help you visualize and analyze the amount of trade activity over a period. 

These volume Indicators include: 

  • On-balance volume (OBV) – uses cumulative volume to predict price movements. It adds the volume on up days and subtracts it on down days. An increasing OBV indicates that buyers are willing to push prices higher, suggesting a potential upward price trend.
  • Chaikin Oscillator – measures the accumulation and distribution of a security over a specified period. It combines both volume and price to provide insights into the buying and selling pressure. A rising Chaikin Oscillator indicates increasing buying pressure, suggesting bullish trends, while a falling oscillator points to increasing selling pressure, signaling bearish trends. 

Chaikin oscillator

  • Chaikin Money Flow – evaluates the flow of money into and out of a security over a specified period, typically 21 days. Positive CMF values suggest that buying pressure is dominant, indicating a potential upward trend, whereas negative values indicate selling pressure and potential downward trends. 
  • Ease of Movement – measures the relationship between a security’s price change and its volume. This indicator provides insight into how much volume is required to move prices and how easily prices are moving. A high EMV value indicates that prices are moving easily with relatively low volume, suggesting strong momentum, while a low or negative EMV value indicates that it takes more volume to move prices, suggesting weaker momentum or potential reversal.

Ease of movement

Volume and price are directly related as generally, an increasing volume of buying will push a cryptocurrency’s price higher. However, for this trend to be sustained, the volume must be maintained. If prices rise on declining volume, it could signal a loss of momentum and a possible price reversal.

How to interpret volume and price:

High volume with price increase

When volume increases along with price, it typically indicates strong buying interest and potential continuation of the uptrend. For example, during the 2021 Bitcoin bull run, significant price increases were often accompanied by high trading volumes on exchanges like Binance and Coinbase.

High volume with price decrease

This scenario suggests strong selling pressure. For instance, during the May 2021 crypto market crash, substantial volumes accompanied sharp price declines, signaling panic selling.

Low volume with price movements

Low volume with rising prices might indicate a lack of conviction in the move, suggesting the uptrend could be weak. Conversely, low volume with falling prices could indicate a potential bottom, as selling pressure might be exhausting.

Volume spikes

Sudden spikes in volume can indicate a breakout or breakdown. For example, news events or regulatory announcements often trigger sharp volume increases as traders react to new information.

Real-World Examples

The 2021 Bitcoin bull run

During the first quarter of 2021, Bitcoin's price surged from around $29,000 to an all-time high of $64,000 in April. This bull run was characterized by high trading volumes across major exchanges. 

The substantial volume increase validated the uptrend, suggesting strong institutional and retail interest. Platforms like Grayscale Bitcoin Trust reported significant inflows, highlighting robust buying activity.

The May 2021 crypto crash

In May 2021, the cryptocurrency market experienced a severe downturn, with Bitcoin's price plummeting from around $58,000 to $30,000. This crash was accompanied by massive trading volumes, indicating heavy selling pressure. 

The sell-off was exacerbated by negative news, including China's crackdown on cryptocurrency mining and trading, as well as Elon Musk's tweets about Bitcoin's environmental impact.

Ethereum's rise in early 2023

In early 2023, Ethereum (ETH) saw a significant price increase from around $1,200 to over $2,000. 

This rise was backed by strong volume, driven by the growing adoption of decentralized finance (DeFi) platforms and the anticipation of Ethereum's transition to a proof-of-stake consensus mechanism. The volume supported the uptrend, suggesting sustained buying interest and confidence in Ethereum's prospects.

Advanced Volume Analysis Techniques

Volume profile

Volume Profile is an advanced charting tool that showcases trading activity within a defined time period at specific price levels. Unlike traditional volume indicators, which show volume over time, Volume Profile shows volume over price. This tool helps traders identify significant price levels, such as support and resistance zones, based on historical trading volume.

Analyzing order books

Order books provide real-time data on the buy and sell orders for a cryptocurrency on an exchange. Analyzing the order book depth and volume can offer insights into market sentiment and potential price movements. 

For example, a large number of buy orders (buy walls) at a specific price level can indicate strong support, while a large number of sell orders (sell walls) can indicate strong resistance.

Volume and market manipulation

In the relatively unregulated world of cryptocurrency trading, volume can sometimes be artificially inflated. This phenomenon, known as "wash trading,"  is a form of manipulation where a trader simultaneously buys and sells a security to artificially inflate its price. This practice undermines accurate price discovery, erodes market integrity, and diminishes investor confidence.

Look out for:

  • unusual volume patterns: abrupt and unjustified spikes in volume without corresponding news or price movements can be a red flag;
  • exchange reputation: stick to reputable exchanges with stringent anti-manipulation policies;
  • regulatory compliance: exchanges that comply with regulatory standards are less likely to engage in or tolerate wash trading.

The Bottom Line

Volume is a fundamental aspect of crypto trading that provides insights into market trends and trader sentiment. By carefully analyzing volume data, traders can make more informed decisions and develop strategies that align with market dynamics. 

Whether it's through basic volume analysis, advanced techniques like Volume Profile, or vigilance against market manipulation, mastering the use of volume can significantly enhance trading strategies.

As with any trading tool, it's crucial to use volume indicators in conjunction with other forms of analysis to build a comprehensive view of the market.