Crypto’s Battle of the Average Prices: TWAP or VWAP? You’ll Never Guess!

Algorithmic trading strategies in crypto

Deep in the dusty, restless corridors of the crypto markets, the machines hum and click away—remorseless, tireless. Algorithmic trading, they call it. No beating hearts to cloud judgment, just cold steel logic slicing through chaos. These algos watch the market like hawks, 24/7, darting faster than any man with nerves intact.

Among these mechanical minds, some prime tactics have emerged:

• Trend following: a surfer catching the ever-shifting financial wave, hoping it doesn’t wipe him out.
• Arbitrage: the ancient hustle of buying cheap here, selling dear there — the timeless dance of the astute.
• Market making: placing bets on both sides, hoping the market’s span between bid and ask feeds your coffers.
• Mean reversion: gambling that prices, like troubled souls, will find their way back to a calm center.

Then, there’s a quiet little coterie within—execution algorithms. They don’t guess the future. No, they sneak you in and out of trades like thieves at night, moving big loads without waking the market’s dog.

Among these shadows lie passive order execution strategies, aiming to slip past slippage and deliver you a fair shake on price, like a good barkeep who never cheats you on the pour. Enter:

• Time-weighted average price (TWAP): the slow and steady tortoise, chopping orders into regular slices, regardless of the crowd.
• Volume-weighted average price (VWAP): the social butterfly, adjusting bids to the market’s pulse, trading more when the party’s loud.

They keep the wolves at bay and let traders wrestle the market without leaving bruises. 🦊

What is time-weighted average price (TWAP)?

Ah, TWAP—simple as a payroll clerk at dust-up time, steady as a preacher’s sermon. It splits a monster order into patty-cakes, served evenly over the ticking clock. No matter the hustle or bustle, TWAP marches on like a solemn drummer.

Its charm is in its humility. It doesn’t care if the market’s bustling or ghostly quiet. It’s your slow dance in a crowded room or a whisper in the empty hall. When the market’s thin, this is your friend, keeping you from selling your soul to slippage or causing a spectacle.

But beware: simplicity has its price. TWAP ignores the market’s volume—like a blind man listening to a noisy crowd but not knowing where the voices cluster. When the storm hits, TWAP might hand you a price neither here nor there, leaving you scratching your head. 🤠

In the end, TWAP is your trusty mule when you need slow, steady work without drawing attention. But if volume has its say—and it often does—you might want to look elsewhere.

Did you know? Just a few clicks on TradingView, and TWAP is yours for the charting. No sweat, no fuss.

How to calculate TWAP

Grab your pocket watch and the ledger. TWAP is just the average of prices taken at regular ticks of the clock, no matter the noise.

Formula? Easy:

In plain speak:

TWAP = (Price₁ + Price₂ + … + Priceₙ) ÷ n

Imagine checking Bitcoin every ten minutes and seeing these whispers:

90,000 → 90,100 → 89,900 → 90,050

Add ‘em like a pile of apples:

90,000 + 90,100 + 89,900 + 90,050 = 360,050

Divide by the four bites you took:

TWAP = 360,050 ÷ 4 = 90,012.5

What is volume-weighted average price (VWAP)

Now, VWAP is the market’s gossip—with a grain of truth and a measuring cup. It doesn’t just count the prices but stacks them by how much trade rumbles behind each.

Where TWAP blindly paces, VWAP dances to the beat of the crowd, giving more weight to the shouts than the whispers. It’s the savvy trader’s compass, saying, “Buy below me and you’ve got a bargain; above me and you’re chasing the tide.”

VWAP’s got its hats and coats: sharper sense of market value, handy for spotting when things get too hot or too cold. But like any clever tool, it can trip on a rogue trade barging in like an uninvited guest.

Still, VWAP is a prized companion for the sharpest traders eager to read the market’s secret diary.

Did you know? This smarty-pants metric first strutted its stuff back in 1988, penned down by some sharp minds in the Journal of Finance. A classic, like whiskey or bad decisions.

How to calculate VWAP

Here’s how the market’s crowd pleaser works: multiply the price by how many hands it changed through, add all that up, then divide by total volume.

Formula time:

Translation for folk without a PhD in finance:

VWAP = (Price × Volume for each trade, summed) ÷ Total Volume

For example, our old friend Bitcoin:

• 90,000 at 10 trades
• 90,100 at 20 trades
• 89,900 at 5 trades
• 90,050 at 15 trades

Multiply each price by its busy crowd:

• 900,000
• 1,802,000
• 449,500
• 1,350,750

Add ‘em up for the final pot:

4,502,250

Count all trades combined:

50

Divide and behold:

VWAP = 4,502,250 ÷ 50 = 90,045

When to use TWAP vs. VWAP?

It boils down to mood and moment. What kind of dance do you want with the market?

If the floor’s crowded and you want to glide with the crowd without stepping on toes or paying too much, VWAP’s your ballroom partner. It’s your measure of the market’s heartbeat.

But if you’re sneaking through a back alley, moving quietly without waking the neighborhood dogs, TWAP’s the steady shadow that won’t startle a soul. It’s the slow drip, the long play, the hush-hush operation.

So, picture this: VWAP for the grand soirée, TWAP for the late-night whisper session.

TWAP vs. VWAP: Key differences to be aware of

TWAP and VWAP in crypto trading

Behind the scenes, traders and big shots lean on TWAP and VWAP as stealthy sidekicks to keep the market’s attention elsewhere—and snag better prices.

1. Strategy’s $250-million Bitcoin buy with TWAP

August 2020, Strategy (not yet MicroStrategy but making noise soon) splashes $250 million on Bitcoin. They didn’t slam the door open; they tiptoed with TWAP, spreading out the impact, making the market feel like someone else was minding the store. They paid close to the average, avoiding that darn price jump most big buyers dread.

2. Definitive’s TWAP strategy for Instadapp (INST)

A crypto VC firm took a slow dance with Instadapp tokens—thin liquidity, delicate moves. Over two weeks, they let Definitive’s TWAP guide their steps, slicing the trade into small, neat chunks. Result? 7.5% savings over VWAP and minuscule gas fees—just the sort of cost control that’d make an old banker blush.

3. Kraken Pro and the use of VWAP

Kraken’s Pro platform comes loaded with VWAP, ready for traders who like their crypto with a side of precision. It’s the tool to catch price dips below the average or to cash out when it’s time. Institutional traders hold it close, trusting it to keep their plays sharp in the frenzied market dance.

Whether you’re a big fish or a cautious guppy, TWAP and VWAP offer secret passages through the wild crypto jungle.

Trade smart, and may your profits be as steady as Steinbeck’s prose. 🎩📈