Master the Trenches: Price Impact, VWAP, and uPnL

Transcript

I'm the co-founder of Definitive Finance. We are a trading application for on-chain tokens, EVM and Solana. And in the month of August, 50% of our traders were profitable. And how did that happen? At the beginning of August, we created these three tools to master the trenches. I'm going to walk through these three tools for you. So first, if you're familiar with the trenches, it's basically low to medium cap trading. So think about 10 to 50 million market cap coins that these traders are trading.

And the unique thing about the trenches is that everything is transparent. Um you can see everything that happens with these liquidity pools and with these traders on chain. You can do analysis on it and you can make your own judgment on when you want to take profit, whether or not the token is overbought or oversold. Um and we made that much easier with our app. Um another trend in the trenches is uh no one trades these majors and large caps anymore. Similar to what Ran said earlier, a lot of the money made being made this cycle is going to be on these lower caps, these launchpad tokens, these mid caps, meme coins, on these new chains.

And then finally, like all of these trades that are happening on chain, completely visible and in the open. Um none of it ever reaches these centralized exchanges. The moment something reaches a centralized exchange, you no longer see the trades happening. You don't You can't do analysis on that liquidity. You can't do analysis on those traders. But if it always stays on chain and still trades between, you know, 50 to 500 million market cap, um you get to do all of this cool analysis that I'm about to show you. So, if you can see all the trades and all the traders of a particular token on chain, what can you do with it? Well, there's three questions you can answer.

So, first you can answer how much does it take to move the price. Um and I think you'd be surprised that it doesn't take a lot of money to send a token from $0 to a billion dollars in market cap. Secondly, what did the market pay? What did all the traders in aggregate pay to trade that token at any moment in time? Wouldn't that be really nice to know to see like who's in profit and how how they're trading? And thirdly, what are the holders sitting on? Like who's profitable? Who's still holding a token? How much profit are they on? Are they suffering from a 50% loss? Um what's that average even look like?

Uh before we can hop into the science, first you need a learn some stuff. So, here's the lesson. Um first lesson is the market cap for a token is completely meaningless. Today, with my phone actually, I can probably launch a 500 million market cap token with just 20K. Um and liquidity and launchpads have made this much easier. You can choose the market cap that you launch with with any amount of money from a dollar to a 500K. Whatever you want, you can define that market cap.

So, unlike last cycle where everyone focused so heavily on market cap, you can't do that anymore. And you might notice that like almost no tokens stay at a billion dollars anymore. Why is that? Well, because there's so little liquidity keeping these tokens afloat that the moment it hits a billion, people are like, "Oh my god, I remember that token hit a billion last cycle. This part is where I get to sell and make a ton of money." So, they sell and immediately it sells over because there's not actually that built-up liquidity that we're used to from previous cycles in this cycle.

And this is a real case. Sometimes $10 of buy action from a trader can move a market cap $1,000. Um so, if I wanted to send a token from ten million dollars market cap to five hundred million dollars, it probably will only take me less than a million dollars to do that. Think about that. Like adding almost five hundred million dollars of market cap with just one million dollars. That's as little as it takes. So, you might notice some candle charts look a bit more rockier than others lately. Um, typically something with a small exit door, aka low liquidity underneath the token, um, will have these volatile wicks. But something with deeper liquidity relative to market cap will be very stable. Small

wicks. Um, and then this is basically the tool that we built, which is a price impact analysis. The price impact, when you estimate your trade that's about to hit the tokens liquidity pool, is going to tell you exactly how much liquidity is underneath that token. So, let's just take an example here. Let's look at Mars Coin. It's a very big BSC runner. It's about a hundred million market cap today. You can see to send that token to five hundred million market cap, about a four x five x in price, um, it's only going to take a million dollars of net buyer action.

It goes the other way as well. You know, to send it down maybe 60% in price lower, um, only 400k or 300k needs to be sold. Crazy to think about, right? Like not a lot of money to make these swings happen. A smaller market cap coin on base here, ten million dollars. Um, if we think about how much it took Binance or the Mars Coin to move to five hundred million dollars, you can see that here it takes a lot more work because the liquidity is much deeper. We've got to move to ten to fifty million dollars, you need about 500k again.

And then this one's a little weird. I've noticed that, you know, there's a lot of, uh, talk about Backpack. Um, if you look at Backpack's liquidity profile, there's basically no liquidity above one billion dollars. Um, and to just get to $1 billion, you only need 2.5 million. So, you got to ask yourself, like, how's the liquidity shape looking? And, you know, what it will what will it really take for these tokens to move? And, you know, am I going to be the seller or the buyer in that liquidity shape? So, what is VWAP? VWAP is volume weighted average price. It's basically what the market actually paid to get that price to get here.

So, this yellow line here is VWAP. Every trade that goes through the liquidity pool, you just figure out how much volume went through, what the price was, and then you just average it. That's a very simple metric. You can do it on TradingView today. And we're going to walk through a couple of patterns of common VWAPs that you might notice. So, this is a very normal legitimate one, I'd say. Token launches, it starts very soft, it retests the VWAP a couple of times, a big candle, a lot of people taking profit, and then continues onwards. You can see this like natural shape of the candles following the VWAP line. Very organic. Great token. I would always buy this shape.

Here we see a more mature version of what we just saw, where at the top you'll start seeing these like smaller candles and the VWAP start getting closer and closer to the candles. What that means is that there's a lot of trading and profit taking happening with some new buyers also happening at the top. So, a lot of churn up there. And typically when this churn is done, it can go either way. It can crash below the VWAP when everyone capitulates, or it can continue going because you got new holders. Now, this is the most sus chart. You have a flat VWAP, and then you see all this candle price action way above VWAP.

That is not legitimate in my eyes because you're not actually creating a lot of volume to move this price. Someone has removed the liquidity underneath that token to create this pattern. This is the other way on the way down, you'll see the candles dip below VWAP. And then, you know, a very common thing that traders look for on our platform is when do I buy back in to a token that's kind of scaled back? Well, typically when the candle has reclaimed that VWAP and when there's a retest of that VWAP, only then should you buy that token because it means there's been a full exchange of traders and holders of that token to allow a new cost basis going

forward. So, a full life cycle of a token typically looks like this. All the way up and you can see these dotted lines that I drew are basically 2x and 3x the VWAP line. Those are typical take profit levels for these low cap tokens and we'll show you some real examples in a bit of real tokens that you're probably familiar with um um that follow this trend. So, Orbeon, very popular AI-driven coin here. Um you can see that the 2x and 3x VWAPs nicely cover that top wick every time you want to take profit. Even the 2x gives you a mini opportunities to take profit and buy in. It never really tests that uh lower bound VWAP. I think Ashley more recently, this is an old chart, it

did test it. Um but early on, you get an opportunity to do with that swing trade and reenter. Uh we look at Cash Cat, one of the best meme coins on Robinhood chain. Multiple opportunities here where it ran up um and then Vlad also tweeted it and then Robinhood also listed it. So, it creates these huge price action moments where you get to take profit at 2x VWAP. Now, it's sort of consolidating right above where the current VWAP is. Great time to enter if it holds that level. Kate, really weird coin, highly manipulated, but surprisingly great entries and exits here. Uh touches the 2x and 3x multiple times and now on its third retest of the VWAP, not there yet.

And then, again, Mars Coin, very similar shape, um testing that VWAP right now. So, it might be a good time to pay attention and buy. Now, the last metric I want to talk to is a little more complex and is very hard to calculate, but our app makes it very easy to calculate. It's called UPNL. And UPNL stands for unrealized profit and loss. So, imagine I could tell you in aggregate all the holders of a coin how much profit they're in or how much profit they have. Wouldn't you want to know? What if you learned that over 90% of the holders of a coin are profitable and they're in tremendous profit, like over 50% profit each.

Doesn't that make you nervous? Wouldn't you want to maybe sell out of that token because so many people are all sitting on paper profits? So, we're able to calculate this. And part of calculating aggregate UPNL is understanding when you want to take profit. Um so, it doesn't really tell you when you want to buy in like Vwap does, but it tells you exactly when things are overbought and maybe when all the holders are getting a little bit too euphoric. So, here there's moments where 90% of wallets are in profit. Typically, that's at all-time highs of the token where it's punching new highs. And in those moments is where you want to start paying attention and when you want might want to be selling or taking some profit.

What you can also do with UPNL is you can figure out the ratio of UPNL against market cap. So, let's say you have a 100 million market cap token, but the unrealized profit of everyone holding that token is 50 million. That means 50% of the UPNL is the market cap itself. Kind of scary. I think around 50% is I've looked at a lot of tokens, 40 to 50% UPNL to market cap ratio is when almost all of these low cap tokens top. Now, what's the exit door here? The exit door is the liquidity pool underneath.

You'll often see UPNL and the market cap as a ratio of the liquidity. So, if there's a 100 million dollar token and there's only 1 million dollars of liquidity, one in 100 traders, you know, are probably going to ever see that price again and realize a million dollars, right? No one actually sees that price. Um so, typically when the token runs a lot, you'll see maybe a 10x ratio or a 5x ratio of U PNL to liquidity. No one's ever going to see that profit unless they're selling on the way up. So, this is a strategy that a lot of our traders use to realize their profits. They almost never sell the top. They always sell on the way up using these VWAP metrics and the UPNL metrics.

So, again, let's look at some of these uh UPNLs on tokens that we know of. You can see that Orbeo today, about $20 of UPNL, but the market cap's only 100 million. So, 20% of that UPNL is uh unrealized profit. And you can also see the UPNL versus liquidity about 4x. Um market cap, uh sorry, the wallets in profit around 60%. So, you can make that educated guess using these metrics on is now a good time to enter Orbeo? Is it overbought? Where is the VWAP at? Um Looking at Stonks here, uh Solana token, uh great protocol for um trading meme coins uh paired with stocks. Uh you can see that the UP- UPNL to market cap

ratio at one point hit 47%. Very, very close to the top. If you had sold that, you would have sold maybe 10% within the top of the price action. Um so, a lot of our traders got out well early before that second spike. And as I showed you earlier, that second spike sometimes can be um very mystifying and manipulated. Um so, this is typically the price action in the life cycle of a token. You'll see that all of a sudden, 90% of tokens or holders are in profit, then suddenly half the market cap is UPNL. Um then the the liquidity.

It's about time to get out at this point. And then finally, you'll see that the price starts retesting that VWAP and starts turning at the top. So, in summary, you know, VWAP and UPNL all available on Definitive Finance. And then price action helps you understand, you know, how large should you be and how do you get out of that position and keep your profits. So thank you so much and good luck in the trenches.