Staying ahead of the game with the changes that take place, world of cryptocurrency can often get tiring. Since the market is so volatile and unpredictable, traders often have difficulty making more intelligent decisions regarding their investments.
The Puell Multiple was introduced as a potential solution to this problem. The number helps investors predict possible market movement in Bitcoin and decide whether it is the right time to buy or sell cryptocurrency or not.
Created by David Puell, the Puell Multiple is now an essential element of the crypto world that investors need to be familiar with before making decisions.
Overview of Puell Multiple
The Puell Multiple is concerned primarily with the supply side of the Bitcoin economy. This consists of the miners and their respective revenues.
By looking into market cycles and prediction from a miner’s revenue perspective, the Puell Multiple gives insight into price fluctuation over time.
Bitcoin miners are often called “compulsory sellers.” This is because they cover fixed costs of mining hardware in an otherwise volatile and unpredictable market.
Being one of the few stable elements in this market gives miners and their revenue the power the influence future Bitcoin prices in the market.
Explanation of the Puell Multiple
David Puell created the Puell Multiple to estimate the approximate sell pressure coming from miners in the Bitcoin industry. A miner’s revenue primarily comes from the subsidies and rewards given to them every time they find a block.
However, the value of that reward can change over time depending on the fluctuations in Bitcoin pricing. When calculated in USD, the value is never constant and varies heavily from one market cycle to the next.
Traders and investors found that looking into the miners’ revenue and the changes and fluctuations helped make predictions. Understanding the value of the block subsidy could help them understand the pressure that miners faced to sell.
But the one issue that cropped up was that keeping track of miner revenue daily did not provide traders with any information on how healthy or reliable that income is over a longer duration.
Calculating the Puell Multiple
Recognizing the need to keep track of revenue that would help traders understand their nature and whether it was healthy or not, David Puell invented the Puell Multiple.
Initially, the Puell Multiple was obtained by dividing the daily coin issuance with the moving average of coin issuance from the previous year. However, this had to be updated and reworked since it did not consider fees.
As Bitcoin gained more traction and popularity, traders saw the creation of a competitive fee market. Fees were a negligible part of a miner’s revenue. But with the growth of Bitcoin, fees became a significant part of their revenue.
The updated Puell Multiple takes a more comprehensive image of a miner’s revenue, rather than just looking at coin issuance to calculate the multiple.
The more recent version of the Puell Multiple is calculated by dividing the mining revenue with the moving 365-day average of the mining revenue from the previous year in USD.
Interpretation of the Puell Multiple
By examining mining profitability and how they influence market cycles, the Puell Multiple allows traders to make better decisions regarding future Bitcoin investments.
Here is a quick breakdown of what the Puell Multiple values stand for in various situations:
- A high Puell Multiple value points to the fact that overall mining profitability is higher than the yearly average. Miners have more incentive and reason to liquidate their assets and may also experience higher sell pressure.
- A low Puell Multiple value indicates that overall mining profitability is lower than the yearly average. Miners may experience income stress, and some will have to reduce hash-power by turning off their rigs. Miners may also have to sell fewer coins which will reduce rates of liquidation.
- The occurrence of a halving event may drop current coin issuance by approximately 50%, compared to the average of the previous year. Miners will face similar consequences as to when the value of the Puell Multiple is naturally low.
Utility of the Puell Multiple
The Puell Multiple functions as a single value that can indicate how healthy miner revenue is at a given point in time. Since it compares this value to a yearly average, traders and investors will better understand the current market conditions.
Keeping track of the Puell Multiple is an effective means of making Bitcoin investment decisions. The figure serves as a singular and constant number in a market built on volatility and unpredictability.
However, overdependence on the Puell Multiple can also have negative consequences. Sometimes, the figure may portray an inaccurate picture of market conditions, which can be detrimental to investors and traders.
China’s Mining Ban
For instance, after China banned Bitcoin mining in June 2021, the Puell Multiple gave misleading signs of the circumstances and encouraged investors to buy Bitcoin. This came at a time when prices were plummeting after the ban imposed by China.
A few traders saw this as a sign of hope for market resumption and bought more Bitcoin. Others saw this as a sign of inaccuracy and unreliability of the Puell Multiple and tried to get rid of their coins by selling them as quickly as they possibly could.
Since the introduction of the ban by China, prices of Bitcoin have started to come up again. But the overall rate is still slow, and the market is yet to recover fully. Such instances indicate that the Puell Multiple is helpful but needs to be approached with caution.
Summing Up
The Puell Multiple is a helpful market metric to understand the current conditions of the economy in comparison to the previous year’s average. By looking into the supply side of the Bitcoin ecosystem, the figure allows traders and investors to think through investment decisions before making a choice.
But like any other figure, the Puell Multiple must be relied upon cautiously, without too much reliance or dependence. It is always best to consider a range of factors before making investment decisions.