TLDR: The Puell Multiple tells us something about how overheated or oversold the market is. In the past, the indicator has been useful as a signal for both market bottoms and tops. While the value for market tops is in a rather linear downtrend, the Puell values for Bitcoin bear market bottoms, have been pretty constant throughout the years.
Imagine you’re a producer of a commodity or a precious metal, let’s say fertilizer. And suppose current prices are much lower than recent averages: maybe there’s been bad weather in the area you sell your product. At such disadvantageous prices, you might decide to grow your stock and wait until the market turns around. And vice versa: if prices have recently skyrocketed, it’s time to sell some or most of your stockpile.
The same principle applies to ‘producers’ of BTC: miners. They also continuously have to factor in this relative market price in their decisions. The Puell Multiple captures these sell-side pressure factors in a single value.
Definition of the Puell Multiple
The Puell Multiple, named after the creator David Puell, is calculated by dividing miners’ daily output of bitcoins (the dollar value of that output) by the 365-day moving average of daily output value.
What does it mean if the Puell Multiple is 4? It means that Bitcoin miners can sell the BTC they mined today at four times the price they could have on average in the past year. Miners are then much more profitable than they have been in the recent past. This incentivizes them to sell, signalling a potential market peak.
Timing Tops and Bottoms
The Puell Multiple identifies when the price of Bitcoin is unsustainably high or low by using the upper red band and the lower green band.
There are times when the value of newly mined bitcoins entering the ecosystem deviates significantly from historical norms. Recognizing these periods can be strategic for us Bitcoin investors. Buying BTC in the green box (below 0.5) has consistently produced outsized returns. Red box territory (above 4) has also consistently provided a nice profit-taking signal.
But wait. Since the number of BTC mined is constant for stretches of roughly four years, why not simply create a chart that plots a simple 365-day moving average and look at divergence from current price?
Indeed, that would work – until the next halving. With each halving, the Puell Multiple resets the valuation for Bitcoin and puts the price closer to the undervalued zone. A 365-day moving average divergence chart doesn’t do this, leading investors looking at this chart to miss a buy signal.
Here’s the same Puell chart, zoomed in on 2014/15.
In the chart, you can see how the sharp drop in the Puell multiple coincided with the lowest dollar value.
But it’s not always the case. Take this Puell/price action from around December 2018. After the first time the Puell value dropped to 0.31, the price was $3.700.
A few weeks later, after bouncing around a bit the Puell hit 0.30 but price was not much lower at 3.195. Still, buying at 3.700 wouldn’t have been a bad deal in the long run: the Puell Multiple was close enough.
So, does this mean simply buy BTC every time the Puell hits 0.31 or so? Not so fast. In 2022, the Puell multiple didn’t go lower…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
