How to Conduct Volume Analysis on Bitcoin

Volume analysis is considered a powerful tool for trading crypto, particularly on Bitcoin. 

In fact, the analysis of price trends tells only part of the story, while the analysis of trading volumes reveals the strength of price movements. 

For example, a potential price increase accompanied by high volumes indicates investor confidence, whereas an identical movement with low volumes might need to be considered a false signal or a trap. 

Volumes

“Trading volumes” refer to the total number of BTC, or their equivalent in fiat currency, traded on an exchange or in the markets over a specific time period. 

Volumes can be analyzed across different timeframes, although the most commonly used is the daily timeframe. 

When analyzing Bitcoin’s price trends over a specific period, it is always advisable to also examine the trading volumes during the same timeframe. 

However, besides the timeframe, there are two other variables to consider when conducting volume analysis on Bitcoin. 

The first concerns the markets that are taken into consideration. 

In fact, often volumetric data is available only on individual exchange platforms, or even on specific trading pairs. 

For example, not only do the volumes on Binance differ from those on Coinbase, Bybit, or Bitget, but they also vary from pair to pair, such as from BTC/USD to BTC/USDT or BTC/USDC. 

The second variable is the unit of measurement. 

In theory, the best approach would be to use BTC itself as the unit of measurement for traded volumes, as it simplifies calculations. However, in practice, USD is predominantly used, which complicates things a bit. 

First of all, it would be necessary to aggregate the trading volumes of the major exchanges to obtain a more comprehensive picture (although a volumetric analysis conducted on a large exchange can often be sufficient). 

Furthermore, it would be necessary to sum the volumes of all trading pairs, including those not involving USD, which complicates matters significantly (also because USDT and USDC do not always exactly equal 1 USD). 

In any case, on traditional candlestick charts, trading volume data typically appears as bars below the price and is often displayed in BTC. 

Utility

Volume analysis on Bitcoin is important because it confirms trends, signals breakouts, detects divergences, and measures liquidity. 

Regarding trends, it reveals their solidity. For instance, an uptrend with increasing volumes is sustainable, but one with decreasing volumes risks a reversal.

Breakouts can also be confirmed through volume analysis. For instance, a resistance level with a volume spike is certainly more reliable than one with low volumes.

Also very interesting is the analysis of divergences, for instance when the price rises while trading volumes are actually declining, because in these cases, volumetric analysis could reveal a weakness that would otherwise remain hidden. 

Finally, it allows us to understand how liquidity moves, although in this case, it is not advisable to use BTC as a unit of measurement, but rather USD or other fiat currencies (USD is generally used the most). 

Unfortunately, on some exchanges, fake volumes are sometimes displayed, which are not due to actual trades between users but rather to operations by the exchanges themselves aimed at making the trading volumes appear higher than they actually are. 

Given that in crypto markets volumes can be manipulated, it is better to use aggregated data from reliable sources such as CoinMarketCap, CoinGecko, or TradingView to analyze them. 

How to Perform Volume Analysis

First, it is necessary to identify and analyze the volume bars. 

Generally, these are found below the candlestick charts and are displayed in the same color as the candles: in green, if the candle has a closing price higher than the opening price, or in red if the closing is lower than the opening. 

At this point, two types of interesting comparisons can be made on the volume bars. 

The first step is to look for obvious anomalies, such as volume spikes (sudden peaks) or actual crashes. 

In this regard, it is important to note that volume bars, like candlesticks, should only be analyzed once they are closed, not while they are still forming. For example, a volume bar from today should be analyzed only tomorrow, once it is closed, and so on. 

Spikes, for example, can indicate potential volatility or reversal. Indeed, during specific events such as halving or regulatory news, volumes often surge.

The second approach is the comparison with historical averages. In this case, it is advisable to compare the volume bars with those from past periods, particularly the more recent ones. Often, for example, it is possible to add a moving average line to the volume bars, which in the case of daily candles can be set to 365 periods to display the annual average. 

The Tools

One of the most recommended platforms for conducting analysis is TradingView. Not only is the basic version free, and includes many crypto markets, but it also offers numerous advanced analysis tools and integration with many real exchanges.

Alternatively, for more superficial analyses, one can use aggregators like CoinGecko or CoinMarketCap, which are particularly suitable for beginners. 

Instead, to analyze on-chain trading volumes, which do not necessarily indicate buys and sells, more advanced tools such as Glassnode or Nansen can be used. 

Obviously, volumetric analysis can also be conducted on the platforms of individual exchanges. 

Additionally, to go beyond raw volumes, there are indicators that integrate price and volume.

One of these is the so-called On-Balance Volume (OBV), a cumulative indicator that adds volume on days with a positive close and subtracts it on negative days. In this way, a rising OBV indicates increased buying pressure, while a falling OBV indicates increased selling pressure. 

There is also the so-called Volume Profile, which displays the volume traded at each price level, thus without a specific timeframe, but within an entire time range. 

This is an increasingly used horizontal indicator, which helps identify high-volume areas to be considered as strong price supports or resistances, and especially the so-called Point of Control (POC), consisting of the price with the maximum volumes in the selected time frame.  

Other useful indicators include the Accumulation/Distribution Line (A/D), similar to the OBV but weighted by the close, the Money Flow Index (MFI), composed of the sum of OBV and RSI, and the Chaikin Money Flow, which measures the money flow.

Advice

Volume analysis may seem trivial at first glance, but in reality, it is a powerful tool, albeit not without risks. 

The main issue is the fake volumes from some exchanges that completely distort the analyses. For this reason, it is advisable to limit analyses to reliable exchanges. 

The most common mistake, however, is to overemphasize the results of volume analysis. In fact, it is by no means an infallible technique, so it is absolutely necessary to combine it with price analysis. 

A common piece of advice is not to limit oneself to analyzing trading volumes on exchanges, but to also extend the analysis to on-chain trading volumes, particularly to identify any significant real movements by whales. 

Although volume analysis is not entirely sufficient to understand Bitcoin’s price movements, it significantly aids in grasping its real comprehension.