On April 18, 2025, a prominent crypto analyst, Flood, tweeted a crucial piece of advice for venture capitalists (VCs) investing in cryptocurrency exchanges. The advice centers around a key metric: the ratio of trading volume to open interest. According to Flood, a legitimate exchange should have a volume to open interest ratio ranging from 2 to 5 times at maximum. This insight came to light after scrutiny over the operations of Binance, particularly its on-chain activities. At the time of the tweet, Binance reported a 24-hour trading volume of $28.5 billion and an open interest of $4.3 billion, resulting in a ratio of approximately 6.63x on April 17, 2025, which exceeds Flood's recommended threshold (Flood, Twitter, April 18, 2025). This revelation has sparked concerns among investors about potential irregularities in Binance's trading activities.

The trading implications of this revelation are significant. Investors should scrutinize exchanges using the volume to open interest ratio. For instance, on April 17, 2025, Coinbase reported a 24-hour volume of $10.2 billion and open interest of $2.8 billion, yielding a ratio of 3.64x, which falls within Flood's suggested range (Coinbase, Trading Data, April 17, 2025). This suggests that Coinbase's trading activity might be more aligned with a legitimate exchange's operations. Traders should consider moving their assets to exchanges with lower volume to open interest ratios to minimize risks associated with potential wash trading or manipulation. Furthermore, the trading volumes of specific pairs on Binance, such as BTC/USDT with a volume of $5.1 billion and ETH/USDT with a volume of $3.2 billion on April 17, 2025, should be monitored closely for anomalies (Binance, Trading Data, April 17, 2025).

Technical indicators and volume data further illuminate the situation. On April 17, 2025, the Relative Strength Index (RSI) for Bitcoin on Binance was at 65, indicating potential overbought conditions, while on Coinbase, it was at 58, suggesting a more neutral stance (TradingView, April 17, 2025). The on-chain metrics, such as the number of active addresses on Binance, which stood at 1.2 million on April 17, 2025, and 850,000 on Coinbase, provide insights into user engagement and potential market manipulation (CryptoQuant, April 17, 2025). Additionally, the average trade size on Binance was $1,500, compared to $2,100 on Coinbase, indicating different trader behaviors on these platforms (Binance and Coinbase, Trading Data, April 17, 2025). Investors should use these metrics to assess the health of the exchanges they are considering for investment.

Frequently asked questions about the volume to open interest ratio include why it's important and how to use it. The volume to open interest ratio is crucial because it can indicate potential wash trading or manipulation. If the ratio is too high, it may suggest that the volume is inflated by non-genuine trades. To use this ratio, investors should compare the 24-hour trading volume of an exchange to its open interest. If the ratio is within the 2-5x range, it's generally considered a sign of a legitimate exchange. Monitoring this ratio over time can help investors detect changes in exchange behavior and make informed decisions about where to invest their capital.