Authors: Vincent Duchaine and Jennifer Kwiatkowski
Proprietary Wealth Umbrella Trading View Indicator name:
- ☂️ WU BTC Kwiatkowski indicator
- ☂️ WU BTC Kwiatkowski Market Top Signal
- ☂️ WU BTC Kwiatkowski Market Bottom Signal
Onchain metrics offer an unprecedented visibility of what is currently happening under the hood of a crypto financial asset and its ecosystem. However, finding the correct metrics to use to improve a trading strategy is its own challenge. Like in any scientific project, the first step we took when we started designing a strategy that could protect us from market downturns was to analyze (nearly) all currently available on-chain metrics and existing data. This extensive work (that took us way more time than we initially thought), allowed us to find which data and indicators were most strongly correlated to the different phases of Bitcoin. Some very intelligent minds have already done some incredible work along these lines, and it’s no surprise that their work is a real light in the darkness of crypto investing. But as nerds and scientists, in the face of all this raw data, we couldn’t resist trying our hand at crafting our own indicators.
We had two motivations for creating our own metrics. The first is that we believed not all major Bitcoin moves had the same initial trigger. Sometimes, like after a halving cycle, it’s the scarcity of supply that drives the price up, but other times, like in December 2017, massive retail adoption is responsible for the euphoria. In these circumstances we firmly believe that having several indicators that track different parts of the blockchain ecosystem will increase the investor's chances to correctly assess where Bitcoin currently is in its cycle.
Our second motivation for creating our own metric was to try to develop indicators that will give a reading of a similar amplitude for each cycle. Indeed some very powerful on-chain metrics previously developed by other analysts, like the NUPL, appear to give an always decreasing reading of the top and bottom points for each cycle.
These types of indicators are often used with a fixed threshold to characterize the zones where Bitcoin is peaking. However, this type of analysis with such an indicator led some very well regarded analyst teams in 2021 to miss a cycle top and say that the NUPL was not in the “euphoria zone” (the blue regions in the above graph). NUPL is just one example, but several other metrics suffer from the same kind of issue, and thus can become unreliable with each new cycle. To circumvent this issue we tried to find what parameters in the blockchain caused some of these metrics to have decreasing amplitudes and normalize our indicators to take these variables into account. Approaching the problem this way allows us to be pretty confident that the indicators we developed will give a reading in the same range for each cycle.
Of the indicators we created, the one we think is the most powerful for identifying the top and bottom of each cycle is one we call the Kwiatkowski indicator.
This metric is actually the superposition of two distinct indicators called the Kwiatkowski Market Bottom indicator and the Kwiatkowski Market Top indicator. These two metrics use different equations but are both related to the economics of Bitcoin investing. Without disclosing the exact formula, they are derived from the relation between the market cap, the realized cap, and the thermocap (if you’re lost between these 3 different ways of computing the whole Bitcoin market value, you should read the blog we wrote on the topic.
Kwiatkowski Market Bottom indicator
Here is the signal from 2013 to now for the Kwiatkowski Market Bottom indicator. This signal will remain very close to zero most of the time. It will only undergo a considerable negative spike during the last leg of the drawdown, or the bottom of a cycle. All previous bottoms (including the 2011 bull run bottom) happened at an indicator reading lower than -30. In this graph, the signal line is colored in red in that zone.
While the decline of the 2017 cycle started at the end of December 2017, the indicator only started to considerably spike down after the majority of the decline in price for that particular bear cycle and so only flaged when we entered the market bottom in November 2018.
Kwiatkowski Market Top indicator
Similarly, but in the opposite sense, the market top signal will give a very low reading for almost all the market conditions except when the economics of the investors start to show signs of overheating and that a major top is coming.
The top has historically always happened when the reading of this indicator is above 20 (denoted in blue in the above graph).
The Kwiatkowski indicator combines these two different metrics by simply scaling them, so their maximum amplitudes are relatively similar, and then adding them together. Here is a graph showing the reading of this combined indicator for the whole life of Bitcoin. As we can see, it provides an excellent perspective on Bitcoin’s cycle. You can check out our blog post on our hedging strategy to learn more about how we leverage this indicator to optimize returns.