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TBL Liquidity Wave: TBL Weekly #162

A New Product + An Update on our TBL Liquidity Indicator

Augustine Carrasco

Nov 7

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Dear Readers,

Today’s Weekly will be packed with updates on the Research & Development side of The Bitcoin Layer. In order to become an industry leader in macro research for bitcoin, TBL has raised the stakes once again.

While focused on making our TBL Liquidity Indicator operational once again, we stumbled upon something amazing. A new product to add to our arsenal, which we will call the TBL Liquidity Wave (chart below)—a byproduct of our TBL Liquidity index:

Our quantitative suite now includes the following three products for all TBL Pros:

Our TBL Liquidity Index
Our TBL Liquidity Indicator
Our TBL Liquidity Wave

At the end of this article, we will describe how we will use each of these products moving forward (i.e., how we use them in our research framework), and provide an update on our TBL Liquidity Indicator. But before that, let us present the TBL Liquidity Wave.

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TBL Liquidity Wave

So, what’s so special about this purple wave? Upon further research and mental exploration, we realized that although our current TBL Liquidity Index is a powerful metric, its values are more dependent on short-term movements than long-term ones. It helps us explain a lot of the short-term movement in risk assets, but can also miss the forest for the trees, so to speak. A distinction between volatility impacts on bitcoin today versus credit creation impulses leading bitcoin prices needed to be struck.

So, we played around with the numbers and landed on this interesting-looking wave. What’s most interesting about it is its relationship with the 12-month change in the S&P 500 and Bitcoin. What stood out like a sore thumb were the time horizon findings. Take a look at the following correlation curves across different lags:

Looking back over the past 5 years, bitcoin’s 12-month trailing log return lags the TBL Liquidity Wave by 175 days, while the S&P 500’s 12-month trailing return lags by 160 days.
Extending the window to the past 10 years, and bitcoin lags by 127 days, while stocks lag by 191 days.

In summary, we can say that bitcoin lags the TBL Liquidity Wave by around 4-6 months, while the S&P 500 lags by 5-7 months. Here’s what those lags look like laid out against our wave:

The lead time does not look too shabby. You might be asking yourself now, what caused the TBL Liquidity information to go from coincident to leading? We’ll give a full breakdown of each component of the suite later, but the short answer here is that we reduced the impact of bond volatility (MOVE) and scaled up the sensitivity to the way we are measuring banking assets for the TBL Liquidity Wave. It allows us to look at today’s markets (TBL Liquidity Index) as a short-term driver while determining the correct sensitivities to longer-term drivers.

How to use the TBL Liquidity Wave? An example

To save you the mental gymnastics of having to reverse-engineer a price estimate from this model, your dashboards will now include a price forecast of where the TBL Liquidity Wave model expects bitcoin and the S&P 500 to be approximately 6 months from now. Let us run a quick example for your reference:...

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