How is volume defined on Coinmarketcap.com when referring to cryptocurrencies like Bitcoin
The total volume traded in a specific cryptocurrency plays a crucial role in determining its volatility. Price reflects the equilibrium of opinions between buyers and sellers. When an equal volume is both bought and sold, the price remains stable, indicating market efficiency.
Mature markets with substantial volume and efficient price discovery tend to experience lower volatility. Cryptocurrency, being inherently volatile, stems from its immature nature and uncertain adoption path. The market comprises diverse participants, including recreational investors, miners, speculators, and institutional investors, each with varying opinions influenced by external factors.
When considering trading a cryptocurrency, the total traded volume provides immediate insights into its likely volatility. Monitoring volume changes over time also offers a sense of interest in the project.
Listing on Exchanges and Volume Impact
To trade a cryptocurrency, it must be listed on an exchange. Exchanges select coins to trade, and being listed on prominent exchanges significantly influences trading volume. The absence of volume in lesser-known cryptocurrencies makes trading challenging due to limited buyers and sellers, resulting in a wide spread between Offers and Bids.
A wider spread indicates less market efficiency and increased volatility. Platforms like Coinmarketcap offer historical volume data for analysis.
Relative Volume and Price Direction
Aggregate volume provides valuable information about a cryptocurrency's trading activity and market efficiency. Relative volume, which correlates volume with price movement, aids in predicting price direction.
On a trading chart, selecting the Volume indicator reveals a bar chart at the base. Higher bars indicate greater volume, with green bars associated with positive price moves and red bars indicating falling prices.
Common Volume Indicators
Momentum: Increasing buying volume propels the cryptocurrency's price higher, but sustained volume is necessary for continued momentum. Volume serves as a reliable indicator of price momentum.
Spikes & Exhaustion: Volume spikes may indicate new momentum or signal exhaustion, marking the end of a move. Large volume spikes could suggest laggards joining the peak, leading to exhaustion.
On Balance Volume (OBV): A simple measure correlating volume changes with price. OBV starts with an arbitrary number and adjusts based on daily volume changes.
Money Flow Index (MFI): Ranging from 0-100, MFI uses volume to identify overbought or oversold conditions. Values above 80 suggest a possible price reversal due to excessive buying volume, while values of 20 or lower may indicate oversold conditions.
These indicators are just a subset of tools in technical analysis, presenting a challenge for traders in choosing from numerous possibilities. For beginners, it is advisable to keep it simple and use volume as part of a broader assessment of liquidity, potential slippage, and momentum. The next article will introduce commonly used technical indicators to complement skills in understanding price discovery, price charts, candlesticks, and volume.
