5 things to know about cryptocurrency trade volumes

6 July, 2019

The strength of an investment asset can be measured in several different ways. One of them is a volume. As the thinking goes, an asset with a comparatively high trading volume is one that is popular with investors. Trading volume is essentially the combined monetary value of the trades of a given asset over a set period of time.

Cryptocurrency volumes are often tracked in 24-hour increments. So if you visit a popular site like CoinMarketCap for example, you will see one of the columns represented as 24-hour volume. This simply tells you the cash value of all the trades for that particular crypto over the last 24 hours. The number changes throughout the day.

Note that there are no openings and closings on crypto markets. Unlike more traditional securities, crypto markets run 24 hours a day. As long as there is at least one exchange willing to make trades, there will be crypto traders looking to buy and sell.

Also note that trade volumes can be misleading. To help you understand why, here are five things you should know about the volume numbers you find on exchange and broker sites:

1. They probably are not legitimate

The first thing to know is something that might shock you if you are new to cryptocurrency: trade volumes are probably not legitimate on most exchange and broker sites. Moreover, the inaccurate numbers are likely inflated. There are plenty of reasons why exchanges would want to inflate these numbers, some of which we will get into later on. The point is that trade volumes cannot be trusted.

Shocking research released earlier in 2019 by Bitwise Asset Management offered proof suggesting that upwards of 95% of all the transactions that contribute to volume numbers are fake.1 They are transactions manufactured by exchange operators for the purposes of inflating volume.

In a July 2 Forbes piece, staff writer and fintech expert Jeff Kauflin suggested that an exchange known as BKEX was copying and pasting transaction data from another, much bigger exchange known as Binance.2 His own comparison revealed transaction data among the two exchanges is nearly identical, despite the fact that BKEX is ranked 20th in terms of daily volume compared to Binance's number one ranking.

2. Numbers don't have to be accurate

Equally shocking to new crypto investors is the reality that volume numbers do not have to be accurate. The vast majority of crypto exchanges now in operation are located in jurisdictions that allow them to do business unregulated. The previously mentioned BKEX is registered in the British Virgin Islands. Its operators can more or less do what they want without having to keep regulators off their backs.

Exchanges allegedly use a variety of tricks to create fake transactions including something known as 'juicing'. Juicing involves inserting comparably large transactions during heavy trading periods when a lot of smaller transactions are also taking place. Juiced trades can be easily pulled off just by moving coins from one exchange-owned wallet to another. This creates the illusion of a large-scale transaction when no coins actually traded hands.

3. Fake numbers encourage trades

By now you might be wondering why exchanges would manipulate their volume numbers artificially. The answer is found in the reality that volume numbers are inflated. In other words, exchanges are pushing their volumes higher. Why? Because higher volumes encourage more trading.

Remember the explanation of volume numbers offered at the beginning of this post. Volume constitutes the combined value of all the trades involving a particular asset. It is generally accepted that high-volume signals strong interest. And where there is strong interest, there is a temptation for new traders to buy.

This benefits the exchange inasmuch as trading fees are assessed on both ends of the transaction. The exchange charges the buyer a certain percentage for the privilege of buying. It also charges the seller a certain percentage for acting as the middleman.

This arrangement is an open invitation to inflate volumes. If higher volumes lead to more trades, exchanges stand to make money by inflating their numbers. It is no more complicated than that.

4. Fake numbers encourage new listings

Buyers and sellers are not the only ones that exchanges are trying to attract. They also want to attract new ICOs looking for a place to list. Even cryptocurrency projects that are not necessarily hoping to release an ICO may want to list on exchange as a means of raising the funds they need to fuel their projects.

High volumes are attractive to these new listers as they are to buyers and sellers. This is advantageous to exchanges in a couple of ways. First, higher volumes will encourage traders to buy in when they see new listings. They will also allow exchanges to charge those new listers higher fees in exchange for being listed on the site.

It is no different than advertising rates. A television or radio network that gets consistently high ratings is able to charge more for advertising than a competing network with lower ratings. Individual programs that draw high ratings also command higher advertising rates than lower rated programs. Exchange listings operate on a similar principle.

5. They don't tell the whole story

The fifth and final point is the most important of all. In order to drive it home, set aside everything else you have read to this point and simply assume that volume numbers are accurate. Though we know they are not, let us go with the assumption that they are for the time being.

If CoinMarketCap shows a 24-hour volume of $31.3 billion for Bitcoin, that volume only accounts for trades registered on exchanges. It does not account for peer-to-peer transactions. If the site shows a $3 billion 24-hour volume for Binance, that number does not account for any and all trades taking place elsewhere.

The point here is that volume numbers do not tell the entire story. In fact, they only tell a small part of the story. There is a lot more to cryptocurrency activity than one exchange's volume numbers. It is no different than the volume number shown on stock exchanges and FOREX trading sites.

Peer-to-Peer trades

While buying and selling on exchanges is the most common form of trading cryptocurrency assets, it is not the only way. The crypto exchange is not a mandatory form of trading. Exchanges really only exist as a way of bringing together buyers and sellers from around the world. But they are completely unnecessary.

Let's say you live in the UK, but you know of a Bitcoin owner in Canada. She is looking to sell $5,000 worth of Bitcoin and you are ready to buy. You could use an electronic or mobile payment system to send her the fiat, after which she could push the coins from her wallet to yours.

Maybe she doesn't want fiat. Maybe she wants to increase her Litecoin holdings. She is willing to sell you bitcoins for an equal value of litecoins. Easy enough. You both initiate transfers that push coins between your wallets.

Merchant transactions

Another thing trade volumes don't account for is the merchant transaction. Let's say you want to use your Bitcoins to make an online purchase or play your favorite casino game. That transaction takes place between you and the merchant, completely separate from what is going on at any of the exchanges. Your transaction doesn't even register with the exchanges.

Of course, merchant transactions have very little to do with trading crypto as an investment. But it has everything to do with value and utility. Bitcoin and most of its descendants exist primarily as monetary systems. They only have value if people can spend the coins they purchase. The ability to spend is known in the industry as utility.

Without utility, a cryptocurrency is worthless. The same is true for fiat. You could hold a ton of British pounds or Canadian dollars in a box in your closet. But they are nothing more than worthless paper if you cannot spend them anywhere. Likewise for Bitcoin, Litecoin, and all the rest.

The point here is that investing in cryptocurrencies wisely means looking at utility as much as stored value. It is all well and good that Bitcoin's price has more than doubled since the first of the year. It is fantastic that you have turned a $1,000 investment into more than $2,000. But your profit is only on paper until you cash out or spend your coins.

Look at all the numbers

The summary of everything you have read here is down to one simple principle: look at all of the numbers before buying digital assets. Do not obsess over trade volume. Look at it for sure, but also take a look at market capitalization, circulating supply, current price, and the 24-hour change rate. That final number (change rate) is a measurement of the change in price over a given amount of time.

Only when you look at all the numbers with a clear understanding of what they mean can you make wise decisions. If you obsess over one number to the exclusion of all the rest, you are not getting all the information. Exchanges are relying on that by the way, which is why they have a tendency to engage in funny business with their volume numbers.


1) U.S. Securities and Exchange Commission. Meeting with Bitwise Asset Management, Inc., NYSE Arca, Inc., and Vedder Price P.C. (PDF) https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf

2) Forbes. The Anatomy Of A Fake Cryptocurrency Trade: How Exchanges Create Phony Transactions. https://www.forbes.com/sites/jeffkauflin/2019/07/02/the-anatomy-of-a-fake-cryptocurrency-trade-how-exchanges-create-phony-transactions/