In the cryptocurrency market, a field filled with opportunities and risks, the price-volume relationship is also a key component for investors to explore market rules and gain insights into the intentions of major players. Whether for newcomers to the cryptocurrency space or seasoned players, everyone understands the significant importance of price-volume analysis for investment decisions. This article will delve into the price-volume relationship in the cryptocurrency market, helping you precisely follow the steps of major players to achieve successful bottom fishing and topping out.
I. The Essence of Trading Volume - Disagreement Drives Trading
In the cryptocurrency market, trading volume is not merely a simple accumulation of transaction numbers; it essentially reflects the manifestation of disagreements among market participants, that is, trading volume = market disagreement. When trading volume significantly increases, it means that there is a huge disparity in opinions between buyers and sellers regarding the current cryptocurrency price. A large number of sellers believe the price is too high and are eager to sell their cryptocurrencies; meanwhile, a large number of buyers firmly believe that there is still room for price increases and are actively buying. This intense clash of opinions greatly enhances trading activity, leading to an increase in trading volume.
Conversely, when trading volume decreases, it indicates that opinions among market participants are becoming more consistent, disagreements are diminishing, and market consensus is strengthening. In this case, both buyers and sellers have weak trading willingness, and market trading is relatively quiet. It can be said that without disagreement, there is no trading; every fluctuation in the market, in essence, is the result of the interplay between disagreement and consensus. It is this interplay that drives the fluctuations in cryptocurrency prices, bringing opportunities and challenges to investors. This also explains why the analysis of changes in trading volume can become a key tool for predicting the market's next direction. Through detailed study of trading volume, we can gain insights into changes in market sentiment and capture signals of market trend shifts.
II. Analysis of Common Price-Volume Relationships
(I) Rising with Decreasing Volume, Continuous Increase
When the cryptocurrency market is experiencing a rising trend with decreasing volume, it means that during the price increase process, trading volume has not significantly increased, but instead has relatively decreased. This phenomenon reflects that the disagreements among market participants are small, and most investors hold a relatively consistent view on the price increase. In this high level of market consensus, selling pressure is light, and cryptocurrency prices can easily continue to rise under the push of buying pressure. Because very few people are willing to sell at this time, while buying demand continues to push prices up, it forms a virtuous upward cycle, allowing the price trend to continue.
Taking Bitcoin as an example, from the end of 2020 to the beginning of 2021, Bitcoin prices continuously rose while trading volume remained relatively low overall. With the continuous inflow of institutional investors and the market's recognition of Bitcoin's scarcity and safe-haven properties, investors reached a high consensus on Bitcoin's long-term value. In this case, market disagreements were minimal; even without a significant increase in trading volume, Bitcoin prices steadily rose from less than $20,000 to nearly $60,000.
(II) Declining with Increased Volume, Not a Deep Drop
Declining with increased volume is usually triggered by panic selling. When significant negative news emerges in the cryptocurrency market, such as tightening regulatory policies or a well-known project collapsing, or when investors develop overly pessimistic expectations about the market outlook, a large number of investors will sell their cryptocurrencies regardless of cost, leading to a sharp increase in trading volume and a rapid price drop. However, such declines triggered by panic emotions are often difficult to sustain. The significant increase in volume indicates a sharp increase in market disagreement. Although there is a large selling pressure, it simultaneously attracts a large number of buyers willing to invest counter-cyclically. These buyers believe that the current price has overreacted to negative factors, presenting substantial investment opportunities.
In May 2021, China strengthened its regulation over virtual currency 'mining' and trading activities, leading to a significant drop in Bitcoin prices and a sharp increase in trading volume. However, after a brief period of panic selling, the market stabilized quickly. Many investors who were optimistic about the long-term prospects of cryptocurrencies believed that regulation would only have a short-term impact and that the significant drop in Bitcoin prices at this time provided a buying opportunity; their active buying quickly repaired the market, and Bitcoin prices gradually rebounded.
(III) Increasing Volume, Not a High Increase
Increasing volume during a price rise means that trading volume has significantly increased during the price increase process, and the disagreement between buyers and sellers has sharply enlarged. Although there is a large buying pressure pushing prices up, there is also a large selling pressure emerging. This huge disparity indicates that there is serious disagreement in the market regarding the current price increase, and the upward momentum is hard to sustain. In this situation, the market can easily reach a peak in the short term, followed by a pressure to adjust.
Taking Dogecoin as an example, in the first half of 2021, the price of Dogecoin rapidly rose due to endorsements from celebrities like Elon Musk, and trading volume continued to increase. However, as trading volume continued to rise, market disagreements became larger. A large number of profit-taking sellers began to emerge, while new buying power struggled to sustain the price increase. Ultimately, Dogecoin prices peaked and fell amidst significant disagreements, initiating a deep adjustment.
(IV) Declining with Decreasing Volume, No Bottom in Sight
A decline with decreasing volume refers to a situation where the trading volume continues to shrink during a price drop in cryptocurrencies. This indicates that market participants do not have significant disagreements about the downward trend, and most investors believe that prices will continue to fall, resulting in very low trading willingness. In this case, there is usually insufficient buying pressure to absorb the selling pressure, and prices tend to continue to decline under inertia until some factors that can change market expectations emerge, known as 'mutations.' These mutations may include significant technological breakthroughs, positive news about industry developments, or sudden shifts in market sentiment.
In 2018, the entire cryptocurrency market was in a bear market, with Bitcoin prices continuously declining and trading volume continuing to shrink. The market held a generally pessimistic outlook on the future of the cryptocurrency market, and investor trading activity was extremely low. It wasn't until early 2019, with some new developments in blockchain technology and a gradual warming of market sentiment, that the market began to stabilize at the bottom.
III. How Major Players Use Price-Volume Relationships to Manipulate the Market
In the cryptocurrency market, there are also major players with substantial financial strength and information advantages; they often skillfully use price-volume relationships to achieve their goals of market manipulation. They know well that by creating specific trading volumes and price trends, they can guide the behavior of other investors, thereby maximizing their own benefits.
During the accumulation phase, major players usually operate covertly. They frequently buy small orders at relatively low cryptocurrency prices to gradually collect chips. Since the buying volume is small, it does not attract much market attention, and trading volume does not show significant increases. As major players accumulate chips, prices may see slight increases, but trading volume remains relatively low. This is because major players do not want other investors to notice their accumulation behavior, to avoid triggering trend-following buying that would push prices up.
After completing the position building, major players will enter the markup phase. To attract more investors to follow and buy, major players will create the illusion of increasing volume and rising prices. They will do this through wash trading, acting as both buyer and seller simultaneously to significantly increase trading volume within a short time, creating the illusion of an active market. At the same time, they will use social media, cryptocurrency forums, and other channels to spread positive news, further attracting investor attention. With the dual stimulation of trading volume and positive news, cryptocurrency prices will rise rapidly, attracting a large number of investors to follow and buy.
When prices rise to a certain height, the major player begins to enter the distribution phase. At this point, the major player will use the market heat created earlier to gradually distribute the chips in hand. They will first sell through large orders, causing a slight price drop. Then, they will buy through small orders, creating a false impression of price stabilization and rebound, attracting investors to buy again. During this process, trading volume will show irregular changes, sometimes increasing and sometimes decreasing. The major player will cleverly use investor psychology to gradually sell all their chips under the cover of trading volume. After the major player finishes distributing, cryptocurrency prices often experience a significant drop, and those who followed the trend to buy will suffer huge losses.
IV. How Investors Can Use Price-Volume Relationships to Follow Major Players in Bottom Fishing and Topping Out
(I) Bottom Fishing Strategy
1. Observe the volume reversal after a decline with decreasing volume: When the price of cryptocurrency has experienced a long-term decline and trading volume continues to shrink, if there is a sudden increase in trading volume while the price stabilizes or starts to rise, this may signal that the market has reached a bottom. This indicates that market disagreements are changing, with new funds entering the market, breaking the original downward trend. Investors should closely monitor this situation, and if subsequent trading volume can maintain a certain level and the price steadily rises, they can consider gradually buying.
2. Combine with technical indicators for analysis: In addition to observing price-volume relationships, investors can also combine other technical indicators to confirm the timing for bottom fishing. For example, when the price of cryptocurrency declines to a certain extent and the KDJ indicator shows an oversold signal while the MACD indicator's green bars begin to shorten or a golden cross appears, these may signal that the price is about to rebound. If this is accompanied by an increase in trading volume, the probability of successful bottom fishing will greatly increase.
3. Pay attention to signs of major players accumulating: By observing the price trends of cryptocurrencies and changes in trading volume, try to find signs of accumulation by major players. As mentioned earlier, major players usually operate covertly during the accumulation phase, and trading volume does not show significant increases, but prices fluctuate within a relatively small range. Investors can analyze changes in address holdings on blockchain explorers to determine whether major players are collecting chips at the bottom. If there is a large accumulation of chips at the bottom and the price trend is relatively stable, this may be a good opportunity for bottom fishing.
(II) Topping Out Strategy
1. Identify the risk of increasing volume with stagnant prices: When the price of cryptocurrency has been increasing for some time and trading volume continues to expand, but the price no longer rises or the increase is significantly reduced, this may signal that the market has reached a peak. Increasing volume with stagnant prices indicates that market disagreements have reached a high level, buying power begins to weaken, and selling pressure gradually increases. Investors should remain vigilant and consider gradually reducing or liquidating their positions.
2. Use trend lines and moving averages for analysis: Utilizing trend lines and moving averages can help investors determine whether the rising trend of cryptocurrency prices has ended. When prices fall below the ascending trendline, or when the short-term moving average crosses below the long-term moving average, forming a death cross, this may signal a price decline. Combined with changes in trading volume, if trading volume also begins to shrink at this time, the signal to exit at the top becomes clearer.
3. Pay attention to signs of major players distributing: Observe signs of distribution from major players, such as irregular changes in trading volume, significant price fluctuations, and the frequent release of positive news. When signs suggest that major players may be distributing, investors should exit decisively to avoid becoming a sacrifice in the distribution process.
V. Limitations of Price-Volume Relationship Analysis and Response Strategies
Although price-volume relationship analysis is of significant reference value in cryptocurrency investment decisions, it is not flawless and has certain limitations.
The cryptocurrency market is characterized by high uncertainty and volatility, and price-volume relationships may not accurately predict market trends in all market environments. In some extreme situations, such as hacker attacks or a country suddenly banning cryptocurrency trading, price-volume relationships may become ineffective. In 2022, the cryptocurrency lending platform Celsius Network collapsed, triggering panic selling in the market, and the price-volume relationship failed to effectively predict subsequent violent fluctuations in the market.
Major players in the cryptocurrency market can more easily manipulate trading volume and prices through techniques such as wash trading, creating false price-volume signals that mislead investors. Due to the relatively weak regulation in the cryptocurrency market compared to traditional financial markets, these manipulative behaviors are harder to regulate and detect.
To address these limitations, investors need to use a combination of multiple analytical methods. In addition to price-volume relationship analysis, fundamental analysis of the project should also be combined, including technological innovations, application scenarios, and team strength of the cryptocurrency; paying attention to the impact of the macroeconomic environment and policy changes on the cryptocurrency market; and employing other technical analysis tools to comprehensively assess market trends. At the same time, it is essential to remain rational and calm, and not be misled by short-term market fluctuations and false signals. During the investment process, setting reasonable stop-loss and take-profit levels is necessary to manage risk and ensure investment safety.
The price-volume relationship is one of the most important analytical tools in the cryptocurrency market, containing rich market information that can help investors gain insights into market trends and follow major players to achieve successful bottom fishing and topping out. However, price-volume relationship analysis is not something that can be mastered overnight; investors need to continuously learn and practice to accumulate experience. At the same time, it is essential to recognize its limitations and to use a combination of various analytical methods to maintain an edge in the complex and ever-changing cryptocurrency market.
