- Onchain and trading volume are essential to consider while investing in a cryptocurrency.
- Volume metrics give traders crucial insights for making better crypto trading decisions.
- Both volume metrics are essential for every trader to understand.
Volume metrics are crucial in cryptocurrency analysis. This data is vital, especially in decentralized finance (DeFi). These metrics provide insights into market activity, liquidity, and investor sentiment.
It helps in preparing the best investing strategies for crypto traders. Two key volume metrics are on-chain volume and trading volume.
Both are essential for understanding the dynamics of the crypto market. These metrics are as important as the support and resistance indicators. Every crypto trader should learn about the volume metrics at the beginning of their journey.
Understanding Onchain Volume
Onchain volume is the total value of transactions recorded on a blockchain network. It includes all transfers of a cryptocurrency from one wallet to another recorded on the decentralized ledger.
It is crucial to decide about which cryptocurrencies are best for investment. For example, if 100 transactions occur on the Bitcoin blockchain, transferring 500 BTC, the onchain volume is 500 BTC.
Blockchain explorers like Etherscan provide real-time data on onchain transactions. Then, Chainalysis is another platform that offers detailed insights to crypto investors.
Onchain volume is essential for understanding network activity and its cryptocurrency. High onchain volume means active usage of a blockchain network.
What’s the Trading Volume?
Trading volume refers to the total value of buy-sell orders executed on cryptocurrency exchanges. This data represents the amount of a cryptocurrency traded within a specific period. The trading transactions are recorded off-chain in the order books of exchanges.
Also, they are reported via application programming interfaces (APIs). For instance, if 1,000 trades occur on an exchange, with 10,000 BTC changing hands, the trading volume is 10,000 BTC.
Trading volume data is sourced from cryptocurrency exchanges like Binance. CoinMarketCap is also known for compiling data from multiple exchanges.
Trading volume is crucial for assessing market liquidity. High trading volume indicates strong investor interest. Also, it makes buying and selling assets easier without significant price impact.
Onchain Volume Vs. Trading Volume
Below, you can check the differences between these two volume metrics:
- Transaction Nature
Onchain volume includes the record of crypto transfers on the blockchain network. Then, trading volume involves buying and selling orders on exchanges. Onchain transactions are recorded on the blockchain ledger, whereas trading transactions occur within the exchange’s order book.
- Data Sources
Onchain volume is derived from blockchain data. It provides a transparent record of transactions. Then, trading volume is sourced from different centralized exchanges (CEXs) and decentralized exchanges (DEXs). Trading volume data is susceptible to manipulation.
- Impact on Price
Trading volume impacts crypto price movements more than onchain volume. High trading volume drives price changes due to increased buying or selling pressure.
- Use Cases
Onchain volume helps check the level of blockchain’s usage. Also, it provides an idea of a network’s health. On the other hand, trading volume helps investors in assessing market sentiment. It allows investors to make informed decisions when investing in the best cryptocurrencies.
Top Examples Of Both Volume Metrics
Below, you can check the top examples for onchain and trading volume metrics:
- Bitcoin: Bitcoin’s trading volume surges as investor interest peaks during bull markets. It leads to significant price increases. Also, it reflects strong market demand for this crypto.
On the other hand, onchain volume rises due to increased activity on the Bitcoin network. High onchain volume showcases increased adoption of BTC.
- Ethereum: Ethereum’s onchain volume has been significantly influenced by the rise of DeFi and NFTs. High onchain volume indicates active usage of Ethereum’s smart contracts and decentralized applications. Trading volume reflects market interest in ETH as an asset.
- Altcoins: High onchain volume for various altcoins highlights their level of network adoption. Then, trading volume indicates market interest.
For example, a high onchain volume in a DeFi token like Aave suggests active usage in decentralized finance applications. Then, a high trading volume indicates strong market demand.
Which Volume Metric Is Better?
Onchain volume data is transparent, as all the transactions are on public blockchains. No one can alter the onchain data. Trading volume helps investors understand market dynamics.
This data is recorded off-chain by exchanges. It increases the chances of data manipulation. So, onchain data analysis is better than trading volume data. However, investors can consider both volume metrics for a better crypto analysis.
Implications for Investors and Analysts
Understanding the differences between these two volume metrics is crucial for every beginner. Investors use onchain volume to assess the adoption of a blockchain network. Also, they use trading volume to identify liquid markets and potential price movements for every cryptocurrency.
Onchain volume provides insights into network health. On the other hand, trading volume reflects market sentiment. Analyzing both metrics together offers a more holistic view of the crypto market.
Volume data helps identify potential risks and opportunities in the crypto market. High trading volume indicates increased volatility, while high on-chain volume suggests strong network activity. Volume metrics help in understanding a crypto project.
Consider other information related to a crypto project, such as whitepaper, tokenomics, market capitalization, network value to transactions ratio (NVT), etc.
Future Developments
Understanding the differences between onchain and trading volume is crucial for comprehensive analysis. Both metrics provide valuable insights into overall crypto market activity.
Volume metrics are evolving to provide more accurate insights as the cryptocurrency market grows. New metrics and analysis tools are being developed to track onchain and trading volumes more effectively.
Advanced technologies like AI and machine learning are being integrated into volume analysis. They can offer more sophisticated and predictive insights.
Regulatory developments can affect the tracking and interpretation of volume metrics. Clearer regulations can provide more reliable volume data.
Disclaimer
The information in this article is for educational purposes only. It is not any investment advice for crypto traders. It is crucial to conduct your own research. The author is not responsible for any losses resulting from the use of this information.
