Key Bitcoin Indicator Flashes Buy Signal, but Its Creator Warns It May Be Misleading

The price of bitcoin has recently bounced from the $30,000 to now trade around $36,000 according to CryptoCompare data, and its movement coupled with a crash in its hashrate led to a key indicator flashing a buy signal.

That key indicator, the Puell Multiple, is the ratio of the daily issuance if bitcoin in U..S dollars and the 365-day moving average of the daily issuance’s value. The indicator ranges from 0 to 10 and if it goes above 8 it shows BTC is overvalued, while below 0.5 it shows its undervalued and may be time to buy.

The Puell Multiple has recently dropped below the 0.5 mark, meaning the value of bitcoin supplied to the ecosystem by miners is relatively low. The Puell Multiple dropping below 0.5 indicates miner capitulation and often marks the bottom of bear markets.

The reading raises hopes for a renewed bull run in the cryptocurrency space, as the Puell Multiple has only flashed buy signals four times in the past. Every time it dipped below 0.5, the price of bitcoin moved upwards shortly after.

The indicator’s creator, on-chain analyst David Puell, has however warned investors that it may be a misleading signal, as it’s based on BTC’s issuance and the cryptocurrency’s hashrate was heavily affected by China’s crackdown on cryptocurrency mining this month.

Bitcoin’s hashrate plunged after authorities from China’s Sichuan province ordered a state-owned power grid to cut the energy of 26 cryptocurrency mining farms in the region. Major cryptocurrency mining pools including Antpool, BTC.com, and Poolin were hit by the other.

The move came shortly after the Xinjiang government directed power plants in the Zhundong Economic Technological Development Zone to shut down their mining facilities earlier this month. Both Xinjiang and Sichuan have historically been major bitcoin mining hubs in China due to their abundant fossil fuel and hydroelectric energy.

Puell has warned investors that “hash rate follows price, not the other way around,” suggesting that traders need to be wary of the signal, as it could be a result of the unnatural hashrate plunge.

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The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.

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