Cryptocurrency is a highly volatile asset where traders and investors often rely on technical analysis to develop strategies. Additionally, data plays a crucial role in helping users better understand the current situation of the entire industry as well as the performance of specific cryptocurrencies, protocols, and exchanges. Among them, the two most important indicators to quickly provide insights into the market are on-chain volume (on-chain trading volume) and trading volume.
However, it is easy to confuse these two concepts, especially when you do not fully understand the definitions of on-chain volume and trading volume.
If you are still learning the difference between the two indicators, this article will explain each concept step by step, including: what is on-chain volume, what is trading volume, and a comparison between on-chain and trading volume. After reading this article, you will clearly understand how to use these indicators and know which indicator is the most reliable for your investment decisions.
What is on-chain volume?
On-chain volume is an indicator that reflects the total volume of cryptocurrency moving between wallets and recorded directly on the blockchain over a specific period. This indicator provides insights into the usage level of a particular network and cryptocurrency. In the cryptocurrency field, on-chain volume is a crucial indicator that helps traders analyze and assess the investment potential of specific coins. This indicator reflects the pulse of the blockchain network.
What is trading volume?
Trading volume is the total volume of cryptocurrency traded over a specific period. This is a technical indicator that reflects the overall trading activity level of the cryptocurrency market. Investors use the trading volume indicator to analyze the current market trend to determine whether that trend will continue or reverse.
The difference between on-chain volume and trading volume
Despite some similarities, on-chain volume and trading volume have important differences:
On-chain volume reflects all transactions moving cryptocurrency on the blockchain, including transfers between wallets, smart contracts, and payments.
Trading volume only records buy and sell transactions related to exchanges, including both centralized (CEX) and decentralized (DEX) exchanges.
Aspect On-chain Volume Trading Volume Information Network status and usage level Market activity and liquidity Transparency Very transparent, based on blockchain data Prone to manipulation Component Transfers between wallets, smart contracts Transactions on centralized and decentralized exchanges Measurement method Direct data from blockchain Reported by exchanges
How to measure on-chain volume
On-chain trading volume on the blockchain is very easy to measure and reliable due to the transparency of blockchain networks. Anyone can access, verify, and calculate this data. This volume can be represented as the total amount of cryptocurrency traded or converted into fiat value.
For example, the on-chain volume of Bitcoin can reach 600,000 BTC per day.
You can multiply this number by the current market price in USD, around 69,000 USD.
To calculate the on-chain trading volume of BTC in USD: 600,000 BTC x 69,000 USD = 41.4 billion USD on-chain volume.
How to calculate trading volume
Trading volume is calculated similarly to on-chain volume and can also be expressed in cryptocurrency or fiat currency. This indicator includes data from both on-chain and off-chain transactions, where exchange transactions are processed off-chain within the exchange's internal system.
The accuracy of trading volume depends on transparent and accurate reporting from centralized exchanges. However, this figure can be manipulated to create the impression of a more active market than reality.
So which indicator should you trust more between on-chain volume and trading volume?
On-chain volume is generally more transparent and reliable as all transactions are recorded on a public blockchain. This data cannot be altered or deleted.
Everyone can access this accurate data. However, on-chain volume does not provide a comprehensive picture of the market, especially when a large amount of trading volume occurs off-chain on centralized exchanges.
Trading volume helps complete the view of market dynamics. However, since the data is based on reports from centralized exchanges, it can be manipulated or inflated to create a more positive scenario for investors.
Therefore, analyzing on-chain data is more reliable, but it is best to consider both indicators for a comprehensive view.
Applications of on-chain volume and trading volume
Although both indicators should be used when analyzing the market, they have different applications. On-chain volume is more suitable for understanding the usage level and acceptance of cryptocurrency. Meanwhile, trading volume helps assess market activity and the amount of cryptocurrency being bought and sold on exchanges.
Why on-chain volume is important
On-chain volume is an important indicator for analyzing the blockchain network for the following reasons:
Market sentiment: When a cryptocurrency project grows and prices rise, people tend to trade more on that network. Buying, selling, and making payments with cryptocurrency increases on-chain volume.
Network health: An increase in on-chain volume indicates a growing and robust blockchain, while a decrease in volume suggests that the network may be facing issues.
Monitoring liquidity: On-chain data provides insights into the movement of liquidity in the cryptocurrency and decentralized finance (DeFi) space.
Network congestion: An increase in on-chain transaction volume can lead to congestion and slow down transaction processing speeds. This data helps identify when transactions are fast or slow.
Transaction fees: High network utilization can lead to spikes in transaction fees. On-chain volume can be used to predict when fees will be higher or lower.
Transparency: On-chain volume helps verify other indicators, including trading volume, which can be abused and manipulated.
Why trading volume is important
Trading volume is a powerful indicator for predicting and assessing the health of the cryptocurrency market. Here are insights that can be derived from analyzing trading volume:
Trend confirmation: A significant increase in trading volume can signal a price uptrend, indicating that traders are entering the market. Conversely, low volume can signal a trend reversal as traders exit the market.
Liquidity: High trading volume indicates high liquidity, making it easy to enter or exit trading positions. Low volume suggests a less active market with fewer people willing to buy or sell.
Volatility: High trading volume can lead to high price volatility when many people trade simultaneously. Conversely, low volume can cause the market to stagnate with slow price movements due to fewer participants.
Market sentiment: It is possible to understand the market's perception of a cryptocurrency. A sudden spike in volume can signal a bullish trend, an accumulation phase, or a reaction to news.
Trading strategy: Investors use trading volume to build short-term, medium-term, and long-term strategies, especially when deciding to buy or sell coins.
Exchange health: Exchanges often report trading volume on their platforms. High volume indicates a well-functioning exchange with ample liquidity, making it easier for traders to enter and exit positions.
Trading volume and on-chain volume — Better combined when used together?
No single indicator can provide a comprehensive picture of the cryptocurrency market when used in isolation. Combining on-chain volume and trading volume analysis offers deeper insights for trading and investment strategies.
On-chain transactions are transparent and verifiable, helping to measure the level of usage and health of a blockchain, while trading volume helps identify trends and how traders react to the market.
For example, you can use on-chain volume to identify particularly promising assets, then use trading volume to find favorable entry and exit points for trades. This dual approach helps you identify promising assets and optimize trading tactics, aligning with your investment goals.
