Key takeaways
- Onchain volume is a measure of total crypto transactions on a blockchain to give insight into the network’s health and use.
- Trading volume shows the total amount of crypto traded on exchanges to show market activity, liquidity and crypto trading volume trends.
- Onchain volume is generally more transparent and verifiable, but trading volume is open to manipulation by exchanges and institutions.
- Both metrics are essential and can be combined to analyze the state of a market to identify trends and build investment strategies for traders.
Cryptocurrency is a volatile asset class where many traders and investors rely on technical analysis to form trading strategies. Adding to this, data is also crucial to understanding the current state of the industry as a whole, along with the performance of particular cryptocurrencies, protocols and exchanges. The two biggest metrics to give a quick snapshot of a market are onchain volume and trading volume.
It’s easy to get these two data points mixed up, especially if you haven’t fully understood onchain volume and trading volume definitions.
If you’re still learning the difference between the two, this article breaks everything down, step-by-step, including onchain volume explained, trading volume explained, and onchain vs. offchain volumes. By the end, you’ll know what they are, how to use them and which is the most reliable indicator for your investments.
What is onchain volume?
Onchain volume is a metric showing the total amount of cryptocurrency that moves between wallets directly recorded on a blockchain over a given time period. This gives insight into how much a network and cryptocurrency are being used. Onchain volume in crypto is a key indicator for traders analyzing investments in specific cryptocurrencies. The metric is the pulse of a blockchain network.
What is trading volume?
Trading volume is the total amount of cryptocurrency that was traded during a given time period. Trading volume is a technical indicator representing the overall trading activity of a crypto market. Investors use market trading volume to analyze the existence or continuation of a trend or reversal.
Did you know? Spot Bitcoin (BTC) exchange-traded funds (ETFs) registered a staggering $4.6 billion in trading volume on its first day of trading as investors jumped on the landmark introduction of the financial product in the US.
Key differences between trading volume vs. onchain volume
While there are some crossovers and similarities between trading volume and onchain volume, there are key differences:
- Transaction volume shows all movements of a cryptocurrency on a blockchain, but trading volume shows only trading-related transactions from exchanges.
- Onchain volume takes into account wallet-to-wallet transfers, smart contracts and payments.
- Trading volume accounts for funds traded on centralized exchanges (CEXs) and decentralized exchanges (DEXs).
Here’s a summary of the key differences between the two:
How onchain volume is measured
Blockchain onchain metric volumes are simple to measure and are reliable figures thanks to the transparency of blockchain networks. Anybody can access, audit and calculate the data. The volume can be represented as the total crypto transacted or represented as a fiat equivalent value.
For example, Bitcoin’s onchain volume could be 600,000 BTC per day.
You can multiply this by the current market price in United States dollars, which is about $63,000.
To give a blockchain transaction volume figure for BTC represented in USD: 600,000 BTC x $63,000 = $37.8 billion onchain volume.
How trading volume is calculated
Trading volume is calculated in a similar way to onchain volume. It can be represented as a crypto or fiat currency value. It shows data from both onchain trading activity and offchain trades, where exchange trades are settled offchain in an exchange’s internal system.
Its accuracy relies on transparent and accurate reporting from centralized exchanges, which might manipulate reported volumes to appear more active than reality.
So, if onchain volume doesn’t show all trading activity but trading volume is manipulated, which should you trust?
Trading vs. onchain volume: Which metric is more reliable?
Onchain volume is generally more transparent and verifiable. This is because all the transactions are recorded on public blockchains. It can’t be tampered with, altered or deleted.
Anybody can access this accurate data. However, onchain volume doesn’t give the full market picture, especially when a significant amount of trading volume happens offchain on centralized exchanges.
Trading volume helps to complete the picture for an understanding of market dynamics. As the data relies on offchain trading reporting by centralized exchanges, it can be manipulated, even inflated, to present a more positive scenario to investors.
So, onchain data analysis is more reliable, but it is useful to look at both metrics for a complete picture.
Did you know? There’s no universally accepted standard method for calculating crypto trading volumes, and there’s even a difference between the reported daily trading volumes of Bitcoin on the most reputable platforms like CoinMarketCap and CoinGecko.
Use cases for onchain volume vs. trading volume
While it is good to use both metrics during market analysis, they have different use cases. Onchain volume is better for understanding the actual usage and adoption of cryptocurrency. Trading volume helps to gauge market activity and how much crypto is bought and sold on exchanges.
Why onchain volume matters
Onchain volume is an important indication for analyzing blockchain networks for a number of reasons:
- Market sentiment: When the crypto project is growing and bullish and prices are rising, people tend to transact on that network. Buying, selling and paying in crypto results in higher onchain volume.
- Network health: Increasing onchain volume signals a growing, healthy blockchain, while slumping volumes point to a faltering network.
- Tracking liquidity: Onchain data gives an insight into where liquidity is moving across the crypto and decentralized finance (DeFi) landscape.
- Network congestion: Increases in onchain transactions can lead to congestion and slow transaction speeds. Data can be used to understand when it is a fast or slow time to transact.
- Transaction fees: High network usage can spike transaction fees. Onchain volume can be used to identify when fees might be more expensive or cheaper.
- Transparency: Onchain volume helps validate other metrics, including trading volume, which is open to abuse and manipulation.
Why trading volume matters
Trading volume serves as a strong indicator for crypto market predictions and the health of the market. Here’s what you can learn from analyzing trading volumes:
- Trend confirmation: Sharply increasing trading volume can indicate an upward price outbreak, suggesting traders are entering the market. Low trading volume can signal a pending trend reversal as traders leave the market.
- Liquidity: High trading volumes indicate high liquidity, as there are more chances to enter or exit trading positions. Low volumes can show sluggish markets with fewer traders ready to buy or sell positions.
- Volatility: High trading volume can result in higher volatility as more people are trading simultaneously. Whereas low volume can lead to a stagnant market where prices move slowly due to fewer active market participants.
- Sentiment: You can understand a market’s feeling toward a cryptocurrency. A high volume spike might indicate an uptrend, accumulation phase or reaction to news.
- Trading strategy: Investors use trading volume to build their strategies in the short, medium and long term, especially when selecting what coins to buy and sell.
- Exchange health: Exchanges regularly report trading volumes for their platforms. Higher volumes indicate a well-used exchange with plenty of liquidity for traders to enter and exit positions quickly.
Did you know? Trading volume analysis of 157 crypto exchanges showed that 51% of Bitcoin trading volumes being reported are likely incorrect, according to research from Forbes.
Trading volume vs. onchain volume — Better together?
Neither metric on its own gives you a complete picture of the crypto market. Digging into both onchain and trading volumes gives you a more informed analysis for strategic trading and investments.
Onchain transactions are transparent and verifiable to deliver a measure for the usage and health of a blockchain, while trading volumes help to identify trends and how traders are reacting to the market.
For example, you might use onchain volume to identify assets of particular interest, then use trading volume to find advantageous entry and exit points for trading. This dual approach allows you to pinpoint promising assets and optimize your trading tactics, ultimately aligning with your investment objectives.