When I first started my trading career, the most essential piece of technical analysis was not the bar chart or a specific oscillator. Instead, it was volume. Volume has often been regarded as the most essential piece of technical analysis because it represents truth and honesty. I was taught that volume is one of the indicators that can not be hidden or obfuscated. However, that was for the traditional stock market. The stock market is a highly regulated and highly enforced trading realm. The stock market is also an environment of fixed supply, so we know how much of the shares of an individual stock are available for trading (known as the float). In a fixed supply environment, volume is an extremely useful and powerful tool. But what about instruments and markets that do not have a fixed supply?
One of the great debates in technical analysis is the debate regarding the efficacy of traditional volume analysis in markets without a fixed supply. Markets like foreign currencies (forex) do not have a fixed supply and thus make traditional volume analysis more difficult. Cryptocurrencies are a little trickier. Cryptocurrencies like Bitcoin have a fixed supply. There will only ever be a certain amount of Bitcoin that will ever be traded. It is estimated that around 4 million Bitcoin is forever lost – unrecoverable due to lost wallets. That’s 19% of the entire supply of Bitcoin missing. Chainanalysis reported back in 2018 that around another 4.8 million, or 32% of Bitcoin’s total supply, was being held in personal wallets. And Coindesk reported in October 2019 that 6.7% of all BTC in circulation is held on exchange wallets. This means that there is roughly 1.2 million Bitcoin out there available for buying and selling on various exchanges.
The aggregate traded volume on the world’s various cryptocurrency exchanges and see there is a massive discrepancy. This discrepancy is between the current supply that is available to be traded on multiple exchanges versus reported trade volumes. There are substantial numbers of fake trades that are generated on various exchanges, with only a handful of exchanges reporting accurate traded volumes – those exchanges reporting honest trading volumes match up with what we would expect to see in regards to volume and price analysis. So that brings us to the same question: is volume analysis useful for cryptocurrencies? One of the maxims in trading is ‘volume precedes price.’ This means that if volume is rising, then big moves are coming. Originally, ‘volume precedes price’ meant that prices were going to increase because the low volume was associated with bearish market conditions, this is still true in most cases but no as true in today’s modern markets.Bitcoin (BTC) Weekly Chart
The chart above is Bitcoin’s weekly chart. You can see where the arrows are pointing concerning price and the volume below. Observe how rising volume in late 2016 through early 2018 yielded the most significant rise in cryptocurrency history – notice how the big spikes in volume coincided with the market top. Then observe the vertical arrows pointing to two other volume spikes: the 2018 bear market low and 2019 high. And compare that with the falling volume and price seen with our current price action. One of the original and useful pieces of volume analysis is finding massive volume spikes near an extreme in a swing. When we see a significant spike in volume near a significant or minor swing high or swing low, this is generally a good sign that a trend change is imminent. What is the current chart telling us? Continuation. While the last three week’s volume bars have been higher than the prior four weeks, the average 20-week volume continues to decline at a sharp rate. That maxim, ‘volume precedes price’ also means that a drop in volume predicts a reduction in price – which is the exact scenario Bitcoin and the cryptocurrency market is in right now. The cryptocurrency market does follow the theory behind volume spikes, just like nearly every other market. If we want to see a new bullish rise, then we need to see volume pour into the cryptocurrency market. We are still waiting for this to happen.