Understanding the size of the cryptocurrency market

• What exactly does volume imply？

• What is the significance of it？

• Volume indicators that are commonly used

• Risks associated with large amounts of data

You'll gradually learn about the basic tools for recognizing price patterns and signals if you read Learn crypto's section on how to trade cryptocurrency in order.

Learning how to trade cryptocurrencies comes down to how successful you are at it, and volume is one of the most important factors that affects pricing.

So, what exactly do we mean when we say “volume”？ The volume of a cryptocurrency refers to how much it has exchanged in monetary terms over a period of time.

Volume is crucial since it has such a big impact on pricing, both in terms of absolute value and relative value.

Market Efficiency & Total Volume

The total volume traded for a particular cryptocurrency is directly proportional to its volatility. Remember that price indicates the balance of buyers' and sellers' perspectives.

Price will be steady if an equal quantity (in terms of volume) is purchased and sold, but stability implies that people's opinions about price are properly informed; this is known as market efficiency.

Volatility is lower in mature markets with large volume and good price discovery. Cryptocurrency is inherently volatile due to its immaturity and unpredictable adoption route.

Market players are a peculiar combination of recreational investors (hodlers), miners, speculators, and institutional investors, each with its own set of opinions and motivations, all of which are influenced by external factors.

So, if you're considering trading a cryptocurrency, the total volume traded will quickly inform you how volatile it is. The volume change over time will also give you an idea of how interested you are in the project.

It may seem self-evident, but a cryptocurrency must be listed on an exchange in order to be traded. Exchanges select which coins to trade, and being listed on the larger exchanges can significantly increase volume.

If you have an opinion on an obscure cryptocurrency and want to buy it at a certain price, for example. Because there will be insufficient buyers and sellers, the difference between the available Offers (buyers) and Bids (sellers) - known as the Spread - will be significant.

The larger the spread, the less efficient and thus more volatile a market is. Historical volume data is available on websites such as Coinmarketcap.

This is the information on Bitcoin, which is the most valuable cryptocurrency by market capitalization.

This is the same data for a coin with a ranking of 500 called Shopping.

Because the daily volume of trade in Shopping is so low, any large increase in trading volume will have a significant influence on the market.

The volume shown is split over several exchanges, each of which will have inefficient markets for anyone looking to purchase or sell the Shopping coin.

Coinmarketcap calculates a Liquidity Score for each cryptocurrency on the exchanges where it is traded, which is essentially a measure of how deep the Order Book is and the risk that Buying or Selling would cause Slippage.

Relative Volume

Volume, taken as a whole, can tell you how much a cryptocurrency is worth and how efficient a market is. Price direction can be influenced by relative volume, or how much volume is linked with price movement.

When working with a trading chart, choose the Volume indicator from the menu, which will appear as a bar chart at the bottom.

The time period chosen for the Candlesticks will correlate to the volume bars. The greater the volume, the higher the bar; green bars imply a positive price movement within the Candle, whereas red bars show a declining price connected with the volume.

Indicators of Common Volume

Momentum

Increasing the volume of purchases will drive the price of a cryptocurrency higher, but volume must be sustained for this to continue. Volume can be a good predictor of price momentum in this way.

Rising prices on falling volume can signal a loss of momentum and a possible reversal. Falling pricing on declining volume can also indicate a change in trend.

Exhaustion & Spikes

Though volume spikes can indicate new impetus in either direction, they can also indicate the end of a move, a phenomenon known as Exhaustion. A big increase in volume could imply that laggards are buying into a trend as it reaches its height, exhausted buyers and sellers and signaling the conclusion of the trend.

Keeping the Volume in Check

On the whole, Volume is a simple metric that can be used to determine the impact of changes in volume on price.

To compute OBV, start with an arbitrary number, such as 100, and add the daily volume to OBV if it grows; subtract it if it drops.

Money Flow Index (MFI)

The Money Flow Index (MFI) is a scale of 0-100 that uses volume to indicate overbought or oversold conditions. It is a gauge of whether the market is becoming overheated, similar to the Relative Strength Index.

MFI levels above 80 indicate a price reversal due to high purchasing volume, whilst MFI values of 20 or lower indicate the inverse - high selling volume and oversold circumstances.

These are just a handful of the many possible indications utilized in Technical Analysis, and they demonstrate one of the most challenging challenges a Trader has.

What tools do you use to sort through the plethora of possible indicators？

Given that you're just getting started, it's best to keep things simple and utilize volume as part of a broad assessment of liquidity (and potential slippage) as well as a momentum indicator.

Our next post on how to trade cryptocurrency will go over some of the most common technical indicators that may be used in conjunction with the knowledge you've gained thus far about price discovery, price charts, candlesticks, and volume.