The total volume traded for a given cryptocurrency has a direct relationship with how volatile it is. Remember, price represents the balance of opinions between buyers and sellers.
If an equal amount (in terms of volume) is being bought and sold then price will be stable, but stability suggests that people’s opinion about the price are well informed; this is known as market efficiency.
Mature markets with significant volume and good price discovery have less volatility. Cryptocurrency is inherently volatile because it is immature and its adoption path is uncertain. Market participants are an unusual mix of recreational investors (hodlers), miners, speculators and institutional investors each with varying opinions and motivations, with those opinions subject to significant outside influences.
So when looking at trading a given cryptocurrency, the total volume traded will immediately tell you how volatile it is likely to be. The change in volume over time will also give you a sense of interest in the project.
It may seem a bit obvious but in order to trade a particular cryptocurrency it has to be listed on an exchange. Exchanges choose which coins to trade, and being listed on the bigger exchanges can make a huge difference to volume.
If, for example, you have an opinion about an obscure cryptocurrency and want to buy it at a specific price. The absence of volume is going to make that really hard – there won’t be enough buyers and sellers, so the difference between the available Offers (buyers) and Bids (sellers) – known as the Spread – will be wide.
The wider the spread, the less efficient a market and therefore the more volatile. Websites like Coinmarketcap provide historical volume data.
This is the data for Bitcoin – ranked no.1 by market capitalisation
This is the same information for a coin ranked 500 calling Shopping
The daily volume for Shopping is so low that any significant new volume of trading will have a big impact on the market. The volume indicated is spread across a number of exchanges, each of which will have inefficient markets for anyone wanted to buy and sell the Shopping coin.
Coinmarketcap provides a Liquidity Score for each cryptocurrency on the exchanges where it is traded, essentially a measure of how deep the Order Book is, and the likelihood that Buying or Selling will adversely affect the price, what is known as Slippage.
Relative Volume
Volume in aggregate can provide useful information about how much a cryptocurrency is traded and how efficient a market is. Relative volume, how much volume is associated with price movement, can help inform price direction.
When using a trading chart you have to select the Volume indicator from the menu, which will be illustrated as a bar chart at the base.
The volume bars will correspond to the time period already chosen for the Candlesticks. The higher the bar, the greater the volume; green bars are associated with a positive price move within the Candle, while red bars indicate a falling price associated with the volume.
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