Market Cap vs Trading Volume: A Chest-Thumping Supremacy Battle
In the fast-paced crypto markets, trading volume and market capitalisation are crucial concepts. Every investor or trader needs to understand them before making any investment decision.
Understanding the two concepts helps you to navigate the pain points when considering buying or selling a particular cryptocurrency. Hence, ensuring that you don’t incur inefficiencies or higher trading costs, which can throw you off guard.
The supremacy battle between trading volume and market capitalisation on which is more important than the other has been going on for decades.
Let’s dive into what these two terms mean:
Market Capitalisation or Market Cap is one of several strategies to measure the size of a firm. You calculate market cap by multiplying the price per share of a share by the total number of outstanding shares. For instance, a business with 10 million shares selling at 25 NZD per share would total 250 NZD million of market cap.
Company Market Cap = Total Existing Shares * Current Price
This formula is a popular metric for traditional securities, but it also has a similar use for cryptocurrency as well. In cryptocurrency terms, this entails the present price of a coin multiplied by the total number of that crypto in the market, usually termed as circulating supply.
Cryptocurrency Market Cap = Total Current Coins * Current Price
The Importance of Market Cap
Market cap enables investors to understand the relative size of one cryptocurrency (or a firm) versus another. Market cap evaluates what a particular token is worth on the open market. That includes the market’s understanding of its prospects as it portrays what investors intend to offer for its coin (or stocks).
Trading cryptocurrencies can either lead to success and riches or financial pain, depending on how you trade. Therefore, it’s vital to know when to surrender an investment that doesn’t have their ducks-in-a-row.
Trading volume in crypto is the same as in the stock market, meaning that it’s the amount of activity that is surrounding a token or coin. This metric will enable you to observe how popular an asset is and how constantly it shifts hands. It’s a ledger of buying and selling surrounding every cryptocurrency, and it can be crucial for organising your trades.
Usually, you measure trading volume by the number of transactions within the past 24 hours. This info is useful for investors to see if an exchange has sufficient trading volume. Furthermore, there’s an overall trading volume tool that records aggregated data from all exchange platforms. An example is CrytpoCompare. Some exchanges will naturally have more volume, making it a walk in the park to trade those assets. Conversely, coins with low trading volume can make it hard to source the amount you wish to buy.
Trading Volume has either daily, weekly, monthly, or annual views depending on what you’re interested in seeing.
Trading volume is the number of shares/cryptocurrencies being traded (Buy/sell).
Let’s say three investors are trading on day 1
Investor 1) purchases 1500 tokens;
Investor 2) sells 2500 tokens;
Finally, Investor 3) buys 750 tokens.
The volume of that particular cryptocurrency would be 4750 tokens and will keep leapfrogging irrespective of the buy or sell price of Bitcoin or other altcoins. This example refers to healthy and natural volume levels. Hype-driven and hyper-inflated volume can be risky, and when making trades involving "hyped up" coins, you should move carefully.
Why Referees Decision is Final
A successful business takes place when there is healthy competition among the players involved. Therefore, as you meditate on the issues between these rivals; here is the order of importance (in my opinion):
The trading volume of cryptos listed on sites like CoinMarketCap or CryptoCompare is easy to read. For instance, approximately NZD 27.8 billion worth of Bitcoin (1,691,212 BTC) shifted hands in 24 hours on 14th August 2019. This dollar figure converts into numerous fiat currencies: Euros (EUR), British Pounds (GBP) or Japanese Yen (JPY) etc. at the click of a mouse. You can also categorise volume by the respective exchanges if that better suits your needs.
In the last 24 hours, about 2.04% of all traded Bitcoin was transferred via Bit-Z where the spot rate is $16,391.67 (as of writing) versus 2.50% via Binance with a spot of $16,382.02. Fundamentally, volume estimates how many individuals are trading the coins. If Bitcoin’s (or other altcoins) price skyrockets and displays massive volume, that indicates scores of people are on the right move. It also means that it will likely continue to rise. However, if the Bitcoin’s price decreases, though, with minimal volume, that could indicate that only a small population supports the trend.
Volume is an essential metric to understand for cryptocurrency due to its multiple uses. Using trading volume one can deduce the movements and direction of a coin. Trading volume can assist in disclosing if recent swings in price are the norm or an aberration. If a coin usually has minimal volume, sudden hefty buying and selling could reflect an ulterior motive behind the moves such as a pump and dump, for example.
You can also scrutinise volumes for different exchanges, which is handy as they often have different prices. Moreover, several exchanges are geographically-based. Europeans, for instance, have an exchange called Kraken. On the other hand, OKCoin operated in China up to the time when the People’s Bank of China cracked down on it.
What Makes Volume so Special in this Contest?
Trading volume by exchange can disclose where customers or traders of crypto are. CoinMarketCap doesn’t, however, consider exchanges with no fees. Free exchanges allow bots and traders to transact tokens back and forth free of charge, emulating a high trading volume.
Typically, the largest and most recognised coins trade continuously. If you organise by trading volume on CrytpoCompare or CoinMarketCap, the famous three coins are XRP (XRP), Etherum (ETH) and Bitcoin (BTC). Plus, they have the highest market caps; no bombshell there. However, if you scroll down a bit, you’ll see Tether (USDT) at position 7. This more controversial stablecoin boasted higher trading volume than household names such as Bitcoin and Ethereum. This fact, plus a remarkable 32.54% shift in the last 24 hours, combined with high trading volume draws plenty of interest.
Alternatively, if we arrange by the low-priced 24-hour trading volume in the top 100, Horizen (ZEN) appears. It has experienced a 27.05% boost in the last 24 hours. That seems impressive on paper. However, the rock bottom volume could concern investors and indicate that the progress is short term, and a correction is likely. Though, there is no sure way to know for certain.
Differentiating the trading volume for 1-day to the trading volume for 7-days is another technique used to analyse trends. As mentioned, over $27.8 billion worth of Bitcoin exchanged hands in the last 24 hours. Roughly $188 billion exchanged hands in the previous seven days!
Cryptocurrencies are unique from stabilised securities to the extent that there’s limited importance in distinguishing metrics. Since coins don’t generate financial statements, they possess comparatively limited parameters. However, we’ll contrast cryptocurrency trading volume to offer a sense of scale.
Compared to Bitcoin's $27.8 billion 24-hour volume, $9.3 billion of Ethereum was transacted. Then there’s quite a decline from ETH to XRP, which witnessed $1.3 billion traded. Looking at traditional stocks now, Amazon trades about $7.5 billion a day in volume. Cryptocurrencies’ high trading volume is one of the reasons their price fluctuates more wildly.
Market Cap vs Trading Volume - The Bottom Line
Several tools exist to arm investors with crucial information. Crypto market cap and cryptocurrency volume reside in the arsenal of those tools. They offer a long term standpoint as price alone varies in the short term. Quotations of the whole market have declined and risen, but Bitcoin’s market cap indicates that it’s still the most influential and most valuable cryptocurrency to beat.
Therefore, for traders, volume points to the sustainability of a given move. A given price boost with decreased volume might be fool’s gold. A decline with substantial volume behind it might indicate a coin is in for a prolonged bear run. There’s the absence of surety in cryptocurrency. However, effectively evaluating volume is a critical tool in an investor’s belt.
About the author:
Verolian Opiyo is a former teacher of English turned content strategist. He specialises in
writing about FinTech and next-generation technology.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Images courtesy of Shutterstock unless stated otherwise.
Last updated: 16/08/2019