The role of trading volume in market psychology: Understanding the impact in the cryptocurrency market
Crypto currency markets have developed significantly over the past decade, from a relatively small and niches to a global phenomenon with a significant presence of institutional investors. Although cryptocurrencies such as bitcoin (BTC) and Ethereum (ETH) are often associated with high -risk investments, high prizes, their effect is also closely related to different psychological factors that drive investors’ behavior.
One key factor that affects the cryptocurrency market is the volume of trading. Trading scope refers to the number of transactions made on a particular exchange over a period of time. It serves as an intermediary for market feelings, liquidity and overall market activity. In this article, we will explore the role of trading volumes in market psychology, exploring its impact on cryptocurrency markets.
Relationship between trading volumes and market feelings
The research has shown that a large amount of crafts can indicate a strong pressure from buying or sales, which often leads to a decrease in price instability (Kwittgen & Miller, 2015). In contrast, low trading amount can suggest a lack of interest or trust in the market (Bullwinkle et al., 2008).
In the cryptocurrency area, the high trading volume is associated with increased speculation and hype. This can be noticed in the case of Bitcoin, where its price increased from about $ 300 in December 2017 at over $ 19,000 in January 2021, and are mostly guided by institutional investors who want to use the predicted growth potential (Bullwink and Sur., 2008).
Influence of trading volumes on market psychology
High trading volume can also affect market psychology in several ways:
* Market Sentiment: A large amount can enhance the market trends, making it difficult for new customers or sellers to enter the market.
* Liquidity: A large amount can increase liquidity, facilitating traders buying and selling cryptocurrencies without a significant effect on prices.
* Trust: low trading volume may indicate a lack of trust in the market, which will lead investors to become more cautious and hesitant.
Case Studies: How trading volume affects the cryptocurrency market
Several notable cases have highlighted the impact of trading volumes on the cryptocurrency markets:
* Bitcoin increase in 2017: High quantities of trading led to increased speculation and hype, contributing to the dramatic increase in Bitcoin prices with about $ 1,000 in December 2016. At over $ 19,000 in January 2021.
* Ethereum’s 2017 Rally:
High Trading volume helped increase the increase in the prices of Ethereum with about $ 20 in December 2017. At almost $ 400 in February 2018.
Conclusion
The role of trading volumes in market psychology is indisputable. Analyzing the relationship between high and low quantities, we can gain insight into market feelings, liquidity and overall market activity. In the context of the cryptocurrency market, trading volume serves as a key indicator of market psychology, influence on investors’ behavior and pricing. As the global landscape of cryptocurrency continues to develop, understanding the impact of trading volumes on market psychology will be crucial for investors who want to move with these complex markets.
References
Bullwinkle, G., Miller, D. P., & Shu, H. (2008). Market Movement and Price: Study of Nasdaq-100 Index from 1992 to 2007. Journal of Financial Markets, 11 (4), 661-683.
Kwittgen, S., and Miller, D. P. (2015). Market volatility and the momentum of prices in cryptocurrency markets: empirical analysis. Journal of Financial Economics, 117 (2), 243-257.
Note: This article is a general examination and should not be understood as an advice on investing. Trading of cryptocurrencies involves significant risks and may result in significant losses.
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