How Bitcoin Prices Affect Exchange Volumes

Bitcoin trade volumes and prices are often, though not necessarily, correlated.

Trade volumes and prices are often, though not necessarily, correlated. Let’s first define volatility as the spread of traded prices during a certain time period. High intraday volatility is when the price of one Bitcoin ranges over a wide range (say trading between $600 and $800), and low intraday volatility is when the price of a bitcoin does not change that much (say, trading between $650 and $655).

This is independent of the start and end of day price – for example you may have a high volatility day that starts at $700, rallies to $800, crashes to $600 then ends the day at $700 where it began. Or you may have a low volatility day that starts at $650 and ends at $655.

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What Do High Volumes Mean?

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With high volumes, this means people are trading, and there is conviction in the market and people want to express their conviction by trading. Sometimes this causes prices to move, for example if buyers dominate sellers then the price will tend to rise. However, if the groups are roughly equal proportion you can get high volumes, but no meaningful impact on price.

Low volume volatility is more interesting. This is when the price moves without many trades necessarily happening. Let’s say some famous economists make a press release publicly advising central banks to hold bitcoin as a reserve currency. At this moment people who were going to sell, or had limit orders in the market to sell could all cancel their orders, and suddenly there would be a lack of sellers at any price. The next trade that happens could be much higher than the previous trade before the press release. So you an get large price movements without large trading volume.

Bitcoin Price Action

What is more interesting is bitcoin price action. Good news tends to take a few days to cause price rises, whereas bad news can cause crashes in seconds. Why? Because to buy bitcoin, you need to wire money to a bitcoin exchange. This could be in the form of an international bank wire. Exchanges then need to recognize these funds transfers before you can buy, which currently tends to be a manual process for most exchanges. This end-to-end process can take a few days. Whereas, to sell bitcoin, you need to send bitcoin to an exchange (1 hour for 6 confirmations) and the process where exchanges recognize incoming bitcoin tends to be more automated. So you can sell Bitcoins within an hour or so of hearing bad news, but it can take a few days to buy.

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