When trading cryptocurrencies, there are a handful of terms you will continue to come across. Volume and Market Cap may be the most common ones, and there is a reason for it. Knowing and understanding what Market Cap and Volume mean will help you to rank a coin's potential risk and popularity. This is very important if you are hoping to be an educated investor.
In the most simple terms, volume as it relates to cryptocurrencies is the total amount of trades that have taken place in a specific period of time. So, the higher the volume on any coin the more individuals or groups are trading that particular coin. The time period the volume is calculated in is determined by the hosting exchange or site, most commonly they will show the 24-hour volume. After reading this explanation you would be forgiven thinking that the higher the volume the better, but this is not always the case. High volume does not necessarily mean anything good or bad in particular, but it is important to be aware of. If the volume for a coin is unusually high or low, this could indicate that there is something going on with said coin that you should be aware of.
Similar to volume, Market Cap can help you to determine the activity of certain coins. Market Cap is the total value of a currency. For example, the Market Cap for Bitcoin is all of the Bitcoins in existence multiplied by the coins current price. Due to this, some have said the Market Cap is one of the most important factors when considering cryptocurrencies to invest in. As with Volume though, a high or low Market Cap does not mean anything by itself. Low market-cap coins can be riskier as they have a low amount of liquidity, however they can also be the most profitable as they may be early in development and not yet established in the market. The same goes for higher Market Cap coins. Coins with High Market Caps are normally very well established and have high amounts of liquidity. Knowing the Market Cap and 24-hour volume of a coin will go a long way in making you a more informed investor.
As we touched on earlier, being aware of an investment's Market Cap as well as its Volume can be extremely helpful. For example, one can use a coin's Market Cap to help determine the level of risk. This can be done by placing coins into categories depending on their Market Cap. You have Small cap coins, ones that have less than a $1 billion dollar Market cap, these are the most susceptible to large price changes and volatility. Then you have Medium cap coins, with a Market Cap between $1 and $10 billion dollars, these are lower risk then Small cap coins, but still have the potential for volatility. Finally you have High cap coins with a Market Cap of $10 billion dollars and more. These present the lowest risk of volatility compared to the other categories.
Not only managing the risk, but monitoring the volume of your investments can help you see particular market trends in action, which in turn will help you to react appropriately. If the volume of a currency you are interested in begins to fluctuate wildly, this may be an indication of a market trend you should be aware of.
If you are new to cryptocurrencies, terms like Volume and Market Cap can seem a bit technical and alien. However, being aware of small things like a fluctuation in 24-hour Volume can make a huge difference. It is always recommended to stay as informed as possible regarding your holdings and monitoring both the Market Cap and Volume is an excellent step.