Bitcoin can sometimes be very unpredictable because of the human factor, miners bring into it. Puell Multiple can help you with making your analysis more consistent. 🤝
What is a Puell Multiple?
The Puell Multiple is an indicator designed to analyze serious market observation cycles based on the profitability of miners.
The multiplier uses the assumption that it is the miners who shape the Bitcoin market cycles as its base. Since they incur various costs (electricity, depreciation of equipment, etc.) in the “production” of bitcoins, they must cover them by selling the cryptocurrency they earn. Miners calculate the optimal moment for this based on the conditional break-even point: the sale price must be higher than the costs and that is exactly what Puell Multiple utilises. ✅
A multiplier based on the profitability of bitcoin miners was proposed in 2019 by the developer of another popular on-chain indicator called MVRV, David Puell. However, the popularity of the tool only came after the publication of crypto-enthusiast “Сryptopoiesis”, which described the usefulness of the indicator for every user. 📖
How does it work?
The Puell Multiple can work using two different algorithms.
Only the Bitcoin emission is taken into account. It is calculated as the ratio of the daily dollar value of newly mined bitcoins to the moving average of the daily dollar value of newly mined bitcoins throughout the last 365-days. This calculation option turned out to be the most popular in the crypto community and on-chain data analysis services. The current value of the multiplier according to this formula can be viewed in Glassnode or Cryptoquant. 💸
Not only the emission of bitcoin, but also transactions commissions is taken into account. Since in the long term, the share of fees in the income of miners will increase due to halving, which gradually reduces the size of block rewards, Cryptopoiesis suggested that the dollar value of the fees received by miners should also be included in the multiplier calculation. 🧮
That way, the dollar value of mined bitcoins is added to the amount of fees paid in the cryptocurrency network. The result is the total miner income for the settlement day, which is divided by a 365-day moving average of all the daily miner income. This option isn’t a part of Puell Multiples functionality and must be calculated manually. The Bitcoinvisuals service is suitable for data collection. 🔎
But what is Puell Multiple used for?
The Pewell multiplier was conceived as a way to determine the tops and bottoms of bitcoin market cycles based on mining profitability. According to the description of the tool on the Glassnode service website, miners are not inclined to sell excess bitcoin they have mined. 📈
It is assumed that the decrease in the profitability of mining would only cause “forced” sales from the miners side to pay for the costs. And the growth of the coefficient obtained when constructing the multiplier chart, that can also be thought of as the increase in the profitability of mining, encourages miners to sell the surplus of mined bitcoin. This is the logic behind the work and analysis of market cycles using the Pewell multiplier. 🙌
Risks and flaws
The multiplier takes a somewhat too generalized approach to analyzing market cycles and assumes that the profitability of mining depends solely on the price of bitcoin. Every year the structure of the mining market changes, this business becomes more complex, requiring carefully thought-out capital allocation decisions. 🧐
Market conditions at the time of the development of the multiplier have definitely been vastly different from today’s and future Bitcoin market cycles. The profitability of mining, embedded in the logic of coefficient interpretation, is too generalized as an indicator without taking into account the peculiarities of local players in the market. Misinterpretation of the behavior of the multiplier can lead to incorrect conclusions.
The Puell Multiple is designed to analyze long-term market cycles and is not used to determine short-term trends. 📈
If you are trying to get that easy profit from Bitcoin, Puell Multiple might help you a lot by showing when it is time to buy the coins. However, an expert can unleash the full potential of the algorithm as well. So, the tool is universal and highly useful for every market participant.