Volume Weighted Average Price (VWAP)
Volume Weighted Average Price (VWAP) in crypto refers to the average price of a cryptocurrency asset over a specific time period, weighted by the trading volume during each interval within that period. It is calculated by multiplying the price of each trade by the volume of that trade and then dividing the sum of these values by the total trading volume during the period.
Mathematically, VWAP is calculated as:
VWAP = (sum_{i=1}^{n} Price_i * Volume_i) / (sum_{i=1}^{n} Volume_i)
where:
- Price_i is the price of the i-th trade,
- Volume_i is the volume of the i-th trade, and
- n is the total number of trades during the specified time period.
For example, let's consider a cryptocurrency that has had the following trades over a one-hour period:
- Trade 1: Price = $100, Volume = 50 units
- Trade 2: Price = $102, Volume = 30 units
- Trade 3: Price = $98, Volume = 20 units
Using the VWAP formula:
VWAP = (100 * 50 + 102 * 30 + 98 * 20)/(50 + 30 + 20)
VWAP = (5000 + 3060 + 1960)/100
VWAP = 10020/100
VWAP = 100.20
So, the VWAP for this cryptocurrency over the one-hour period is $100.20.
Traders often use VWAP to assess the average price at which a cryptocurrency has traded throughout the day and compare it to the current market price. It helps traders identify whether the current price is above or below the average price traded, providing insights into potential trends or deviations from the norm.