The Puell Multiple examines the fundamentals of mining profitability and the way they shape market cycles. It is calculated by taking a ratio of daily coin issuance (in USD) and the 365 moving average of daily coin issuance (in USD).
Interpretation of the Puell Multiple can generally be considered in the following framework:
High values indicate that current miner profitability if high compared to the yearly average. As such, the incentive for miners to liquidate their treasuries is high and greater sell pressure may be expected.
Low values indicate that current miner profitability is low compared to the yearly average. As such, income stress may become a factor, and some miners may need to start reducing hash-power by switching off rigs. This increases the hash-share of remaining miners who can then sell fewer coins to cover their operations, reducing their impact on liquid supply.
Halving events will drop the current coin issuance by 50% relative to the preceding year creating an immediate halving of the Puell Multiple also. The effect on miner profitability will thus be as per the point on low values above.
The Puell Multiple is calculated by dividing the daily USD value of coin issuance by its 365 day moving average.
Miners are compulsory sellers in Proof-of-Work networks as a result of their necessary capital expenditure on mining hardware, logistics, facilities, and power consumption. Furthermore, profitable operation of mining facilities is a challenging business, requiring well considered capital allocation and investment decisions. This is a direct result of the protocol difficulty adjustment which maintains a deterministic coin issuance, such that approximately the same number of coins are mined irrespective of hash-power applied to the network. As a result, the mining industry is extremely competitive and operates on very slim profit margins.
Miner profitability can therefore be considered a useful input when attempting to estimate supply-side sell pressure. The Puell Ratio achieves this by comparing today's aggregate fiat denominated miner income, to the yearly average. A 365-day average is selected to reflect an expected baseline income congruent with a miner's long-term investment horizon and planning decisions.
Miners are often net bullish and long the asset that is being mined. Many miners will therefore have treasury reserves of excess coins that are mined, but not necessary to sell to cover ongoing costs. During bullish markets, the incentive for new miners to start operations, and for existing miners to expand increases alongside the fiat value of their treasuries. This creates an opposing force and incentive for miners to liquidate some portion of their treasury reserves to maintain their share of network hash-power.
As the incentive to sell mined coins increases, larger capital inflows are also necessary to absorb this sell pressure. The Puell Multiple will be trending higher in these instances, particularly during periods of rapid upwards re-pricing that significantly outstrips the lagging yearly average.
Puell Multiple values greater than 4.0 have historically signalled macro market tops, although it has reached values between 6 and 10 in early Bitcoin cycles.
During extended bear markets, mining profitably becomes increasingly difficult. As prices fall, the aggregate income similarly falls, despite ongoing mining costs remaining at elevated levels. The cost of mining is generally considered fixed within each difficulty adjustment window (14-days for Bitcoin) which itself is defined by the overall hash-power competition on the network.
Miners with stronger balance sheets and low operational costs will be capable of withstanding longer and deeper bear market conditions than those with higher operational overheads. As prices fall, miners will necessarily liquidate more of their income, and begin liquidating treasury reserves to cover their costs, exacerbating the bearish conditions.
At some stage, mining profitability will squeeze out miners who reach their break-even mining price, and result in that hardware being switched off to cut back power consumption. Miners in stronger financial positions, who remain active on the network, will subsequently gain in relative share of hash-power. These remaining miners will have a larger share of the income, mined for the same fixed costs, and therefore can liquidate fewer coins and begin building reserves.
At this time, the Puell Multiple will have reached low levels below 1.0 indicating that miners are likely experiencing income stress. Historically, significant macro bottoms have been established at Puell Multiples less than 0.5, indicating miner profitability is 50% below the yearly average.
David Puell (March 2019)
cryptopoiesis - The Puell Multiple: A New Barometer of Bitcoin’s Market Cycles