It is this aspect that makes the two specific concepts of this market, market capitalization and trading volume, most important.
As an investor, or even as a trader for that matter, you will need to understand these concepts in a better way and for that you will first need to know the differences between them. It will be easy as this article will help you in this process.
When you are buying or selling or investing in crypto coins, particular ones or in general, such knowledge will help you to identify the pain points and navigate around the pitfalls easily and effectively.
You will not be taken off guard and such knowledge will also ensure that you do not incur any losses or high trading costs. Check out Bitcoin vs Ethereum.
Also, this knowledge will help you to be well versed with the ongoing battle for supremacy between market cap and trading volume of crypto coins and how each of these impacts the market conditions and its effect on the price of the crypto coins.
You will also know which is more important among these two at the end of this article.
5 Differences Between Crypto Market Cap and Volume
Though you may think like all other people do and consider the relationship between trading volume and market capitalization of a crypto coin to be linear, it is not so.
It will be clear to you if you first make it a point not to mix up the crypto market with traditional stock markets which have an evident tendency towards correlation.
Next, you should consider the immaturity of the crypto market compared to the traditional stock markets and you will know the reasons for the inefficiencies of its present exchange model.
Finally, these differences between the market cap and the trading volume of a crypto coin will let you clear out all of the discrepancies, misconceptions, and more. Here they are.
The trading volume of the crypto coins usually refers to the metric that measures the amount of activity regarding a specific crypto coin or token. The figures will enable you to know about the popularity of the crypto assets you want to deal with as well as how consistent it is in shifting hands.
In simple terms, it is the ledger that tells about the buying and selling figures which will help you to make crucial decisions regarding your trades and organize them.
On the other hand, market capitalization or market cap, as it is commonly known, is one of the different approaches that are used to determine the total value of the coins that are in circulation in the market at a specific period of time.
Generally, the trading volume is measured by the number of transactions made with a specific crypto coin within a time span of 24 hours.
Trading volume tools are also used to find out the overall volume and determine whether or not it is sufficient. These tools usually record all of the aggregated data available from all different exchange platforms.
In order to determine the market cap of a crypto coin it is the current price that is considered, along with other specific tools as well. However, this does not describe the size of the company or its equity value.
This is because you will need a much more thorough analysis of the fundamentals of the company for that. The market price of the coin will not necessarily depict the worth of a business because these are often over-valued or undervalued by the market itself.
The formula used for determining trading volume is: The number of shares / the number of crypto coins being bought or sold.
In contrast, the formula used to determine the market cap of a crypto coin is: Total number of coins in circulation x the current price.
The market cap helps the people to understand the current and future prospects of the crypto coin and more importantly what an investor is willing to offer for it.
As for the trading volume, it depicts where exactly the traders and customers of crypto coins are on an exchange. However, this may not always be real in all respects.
Since exchanges of coins can also be made without paying any fees on a few specific crypto platforms, this may emulate high trading volumes that may not have any significant or explainable relation with the market cap.
5. Some Other Differences
Apart from the major ones, here are some other differences between the trading volume and the market cap of a crypto coin.
Coins that have higher trading volume will easily provide high returns when traded as compared to those coins that have a low figure. However, the same cannot be said always in terms of market cap.
You can have trading volumes in different time spans such as daily, weekly, monthly, and annual. It is up to you which particular type of trading volume you wish to see depending on your interests. As for the market cap, it is usually for a longer period of time.
Which is More Important – Crypto Market Cap or Volume?
When you consider the ratio between trading volume to the market cap of a crypto coin, you should be cautious.
You may typically imagine that the coin with a larger market cap will have a higher trading volume as well for any given period of time.
However, if you take a closer look at the charts you will see that it is not always true.
When you compare the market cap of a crypto coin with its trading volume you will see a large variety of outliers.
This means that when the market cap of a coin is high the trading volume can be very small whereas one with a lower market cap can have a trading volume of nearly or even more than half of it in a specific time period.
Also, you will see that the crypto coins that rank higher in terms of the market cap can feature a much lower rank in the list of the trading volume.
Relation between market cap and trading volume is typically a concept that works well in the stock markets where the coins with smaller caps, especially those coins that are of low profile may have much larger utility in comparison to those coins with higher market caps.
However, this concept does not work well when it comes to crypto markets. This is mainly due to the market inefficiencies.
In the crypto market, the coins that do not do well in major exchanges typically enjoy less volume in comparison to those coins that do. This is irrespective of their market cap.
Another reason for a specific type of crypto coin may not have a high trading volume in spite of having a larger market cap is the holding of those coins by the major investors or whales in crypto terms.
It is most likely that the coins will sit in their wallets instead of being shuffled across wallets or exchanges on a daily basis.
Therefore, it can be said that both trading volume and market cap are important by their respective virtue to make a crypto trading and investment decision.
In simple terms, it can be said that crypto coins with higher markets usually trade continuously on one exchange or the other.
As it is evident, the relation between market cap and trading volume is not at all linear but it surely is quite intuitive.
Therefore, you will need to analyze the trends to get a sense of scale as well as a fair idea about the price fluctuations and know which is likely to continue to rise.
However, trading volume is just a bit more significant because it serves multiple purposes. Trading volume will also help you to know the direction and movements of a crypto coin.
By analyzing the recent trends you can even deduce whether the price swings are an aberration or just a norm.
Trading volume also matters most because it helps the investors to avoid radical price movements of a crypto coin after a noteworthy sale.
It also acts as a testament to the trustworthiness of a crypto platform which in turn helps the investors to avoid being scammed.
A notable increase in the trading volume typically indicates a big move in the price of a crypto coin.
In simple words: both are important since both have significant purposes that help the traders and investors to make their final decisions. Therefore, it is important to know about the difference between them to be on the safe side.