Crypto: On-chain Volume vs. Trading Volume

The ‘on-chain volume vs. trading volume’ metric compares the amount of trades taking place on exchanges with the number of transactions recorded on the blockchain.

You may think it looks complicated at first, but it’ll be easier to analyse once you read this article explaining what on-chain volume is and how to read onchain vs. trading volume graphs.

Trading On and Off chain

Volume in the crypto market represents the number of coins traded. When we talk about on-chain volume, we mean the number of valid transactions recorded on the blockchain.

If on-chain volume is high you know that lots of users are trying to execute transactions at once. This often leads to higher fees for network users who pay more to make sure miners add their transactions to the blockchain.

When coins are traded on exchanges (like Binance, Coinbase or Kraken) these transactions occur off-chain. In other words, transactions aren’t validated on the blockchain’s public ledger and fees are set by the Exchange.

Trading on-chain has its pros and cons compared with trading on an exchange. Blockchain transactions can’t be changed or manipulated making on-chain transactions more secure, but it can also be more expensive because of the fees paid to miners.

Understanding the On-chain vs. Trading Volume graph

Now you know the difference between on-chain and off-chain trading volume, let’s analyse this rather scary-looking graph.

The Onchain vs Trading volume graph shows the volume of BTC traded on exchanges (green) and compares them to onchain transactions (blue) at different price levels. Major fiat on-ramp exchange Coinbase is used as representative of on-chain trading volume. Graph courtesy of Swissblock Technologies.

The graph compares Bitcoin’s trade volume (represented by the green and blue bars) to its price (the black line). Three Bitcoin metrics are merged into one graph: pice across time, on-chain transaction volume and trading volume at different price levels.

It’s important to note that volume is measured in relation to price, but not time. So while BTC price relates to the x-axis along the bottom of the graph, volume is measured by the x-axes at the top of the graph and is shown for different price points.

Graph courtesy of Swissblock Technologies.

For example, a peak in both on-chain and off-chain transaction volume occurred when BTC was in the $32-$35k price range. On-chain volume surpasses 400,000 BTC while off-chain volume is over 50,000 BTC.

The graph combines the trade volume each time BTC reaches a particular price level. Clearly, lots of bitcoins change hands at the $34k mark which BTC hit multiple times in January and at the start of February.

Metric insights

The reason this information is valuable to traders is because it can indicate where BTC price has formed support and resistance levels.

Graph courtesy of Swissblock technologies.

When support levels form (marked by red lines) they act a speed bumps. If price is falling support levels can buoy up price, but will break when downward momentum is strong.

If you look at the pattern that volume makes when compared to price you’ll notice that when support levels break price falls quickly through areas with low volume. Price also rises quickly when volume is low and consolidates in price walls when volume peaks.

Why look at on-chain and trading volume together?

At this point, you may be wondering why we need to look at both on-chain and off-chain volume when they form the same pattern. One of the main reasons to look at both is to confirm if transactions on exchanges are “real”.

According to CoinDesk, some exchanges report fake volumes because their data can be manipulated, so comparing exchange volume and on-chain volume lets you verify volume at different price points.

Comparing on-chain and off-chain transaction volume can help you verify that data on exchange trading volume is accurate. Off-chain volume should behave in the same way as on-chain volume.

Closing thoughts 

Comparing trading volume on exchanges and on-chain volume lets you confirm that volume data from exchanges is valid. This extra level of validation can shore up your conclusions about where price walls have formed and where trade volume is low – important insights for any trader.

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