Among the metrics necessary for crypto traders and investors to understand for profitable trading experience are on-chain volume and trading volume. While on-chain volume depicts how often cryptoassets are sent from one wallet to another, trading volume tells you the amount of that cryptoasset being bought and sold on crypto exchanges.
On-chain data further reveal transactional activity and can help verify network adoption and utility of a particular cryptoasset. In contrast, trading volume plays an important role in assessing liquidity, or how easily an asset can be bought and sold without significant price impact. Together, these two indicators help traders see which cryptoassets are popular, understand market trends, and make smarter trading choices.
What is onchain volume?
On-chain volume is a measure of the actual transactions that occur on the blockchain network of a particular cryptoasset. It represents the total amount of cryptoasset transferred on a blockchain over a given period. This includes transactions like wallet-to-wallet transfers, staking rewards, mining rewards, and payments for goods and services.
Every time coins are moved from one wallet to another, that transaction is recorded on the blockchain, adding to the on-chain volume. Unlike trading volume, which is primarily associated with buying and selling activities on crypto exchanges, on-chain volume is a representation of a cryptocurrency’s broader activity and utility within the network.
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Importance of on-chain volume
On-chain volume shows actual usage of the blockchain network, indicating its adoption, utility, and economic value. For some decentralized networks, high on-chain activity suggests the ecosystem’s health and growth, while low activity might signal a lack of adoption or declining interest.
Another benefit of tracking on-chain volume is that it helps traders identify market trends. High on-chain volume often signals investor interest in a specific cryptoasset. When users actively move a particular cryptoasset, it could indicate accumulation or distribution phases, which often results in a price rally.
Beyond serving as a trading strategy, high on-chain volume is often a good sign of a cryptoasset’s long-term health. A crypto network with active transactions and users is generally more sustainable over time, as it shows adoption and demand for the cryptoasset.
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Trading volume in crypto markets
Trading volume is one of the most closely watched indicators in the crypto market. Unlike on-chain volume, which highlights direct blockchain activity, trading volume reflects the buying and selling activity on crypto exchanges.
It refers to the amount of a cryptocurrency or total value of assets traded on exchanges over a specific period. This metric includes both centralized exchanges (CEXs) and decentralized exchanges (DEXs) and can offer a snapshot of the market’s liquidity and investor sentiment.
Importance of trading volume
When trading volume is high, it often signifies a healthy level of market interest, making it easier to buy or sell large amounts of a particular cryptoasset without significantly affecting its price. In other words, high trading volume indicates that an asset is more liquid, meaning it can be bought or sold quickly without significantly affecting its price.
In addition, when an asset has high trading volume, it’s less susceptible to price manipulation, as large trades are absorbed more easily without causing significant price swings.
Another reason trading volume is essential is its role in price stability and trend confirmation. In general, an asset’s price movements are considered more sustainable if they are accompanied by high trading volume. For example, bitcoin’s recent price rally to a new all-time high above $89,500 is viewed as a strong signal for a bull market given the accompanying high trading volume. Conversely, a price movement with low trading volume may not be as reliable, as it could be driven by a small group of traders or a lack of liquidity rather than broad market interest.
Also, trading volume can help traders identify key support and resistance levels. How? When an asset trades heavily at a particular price level, that level becomes a focal point where buyers or sellers may enter the market, creating a form of psychological boundary. Recognizing these patterns can help crypto traders make decisions about when to buy, sell, or hold, depending on the volume activity at these levels.
Moreover, traders can use trading volume to ascertain the overall market sentiment. For instance, a rise in trading volume across multiple cryptoassets could indicate a potential bull run. On the other hand, a consistent drop in trading volume during a downward trend might imply a potential bear season.
Read also: Crypto Trading Bots: Benefits and risks explained
Conclusion
Both on-chain volume and trading volume are important metrics in the crypto market, as they give insights into market trend, asset liquidity, adoption level, and how investors view a particular cryptoasset. Together, on-chain and trading volumes give investors a more holistic view of a cryptoasset’s activity, helping them make smart investment decisions. Altogether, analyzing these volumes alongside other trading indicators can lead to a more profitable crypto-trading or investment experience.
Read also: How to Build a Diversified Crypto Portfolio
Ndianabasi Tom A Petroleum Engineering degree holder, Ndianabasi’s interest since 2018 has been studying the ever-growing field of blockchain and cryptocurrency, keenly evaluating the innovation, exploration, and expansion of this field locally and globally. The founder of Nitadel a media platform, Ndianabasi has been a Writer at Crypto Asset Buyer (CAB) since 2021. When he is not drilling resources in the blockchain and cryptocurrency field, Ndianabasi is singing, reading, watching crime movies, or playing football.
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