Investing in Bitcoin Using the Mayer Multiple
Traders can often get caught up in a bubble or a downturn and lose sight of the bigger picture. However, there is an indicator that shows how common the current price level is in relation to bitcoin’s history, allowing investors to identify tops (and to a lesser extent bottoms) with ease.
What is the Mayer Multiple?
The Mayer Multiple (MM) is a tool developed by bitcoin investor and podcast host Trace Mayer, where the metric is equal to:
MM = (current price of bitcoin)/(200-day moving average value)
As a long-term indicator of oversold or overbought conditions, the Mayer Multiple identifies when the price of bitcoin is ‘normal’ or ‘abnormal’.
The 200-day moving average is one of the most watched technical indicators. If the price of an asset goes above its 200-day moving average, it is considered bullish, while a dip below the 200-day moving average is viewed as bearish.
Read more about moving averages in the Trading Resources section of Interdax’s Help Centre.
However, if the market extends too far above or below a moving average, the price tends to be pulled back toward it. For instance, if the price moves too far below the 200-day moving average, it suggests the asset is oversold and motivates a bullish outlook. Most financial time series data exhibits a characteristic known as “mean reversion” and the MM capitalises on this.
The Mayer Multiple measures the gap between the current price of bitcoin and the 200-day moving average, where the Multiple is:
- Equal to 1 if the price of bitcoin exactly matches the 200-day moving average,
- Less than 1 if the price of bitcoin is below the 200-day moving average, or
- More than 1 if the price of bitcoin is above the 200-day moving average.
How to Use the Mayer Multiple
You can keep track of the MM here or by following @TIPMayerMultiple on Twitter.
Charting the Mayer Multiple
You can also add the Mayer Multiple as a custom indicator on TradingView charts:
Willy Woo’s website, Woobull charts, also charts the entire history of the MM:
The peaks in the MM were relatively high in Bitcoin’s early history as the price exhibited more volatility. These peaks have decreased as the bitcoin market matured. For example, in the early days of bitcoin trading, the MM reached heights of 10 but at the most recent top, the value was just 2.48.
A similar pattern is observed for the lows, with the record low at 0.236 occurring during late 2011.
Using the Mayer Multiple to Trade BTC-USD
According to Trace Mayer, a value of 2.4 or more is considered a speculative bubble (which is shown by the dotted line on the chart above). Throughout the entire 2017 bull market, the MM did not exceed 2.4 until the all-time high near $20,000 was reached.
At the peak of the 2017 bull market, the MM suggested bitcoin was in a bubble and indicated a top in BTC-USD. Every time that the metric has exceeded 2.4, it has returned to below 1.5. Therefore, the threshold value of 2.4 can be used to identify bubbles in the price of bitcoin, providing a sign for investors to sell bitcoin and re-accumulate once the Multiple goes back below 1.5.
Also, investors should look to buy bitcoin whenever the metric is below 2.4, as implied by the simulations performed by Mayer. These simulations assumed an individual had $100 per day to invest in bitcoin and if the price was below the Mayer Multiple, they would buy bitcoin.
If the price was above the Mayer Multiple, the individual would accumulate fiat until the price dropped below the Multiple. The returns an investor accrued increased as the MM increased, but suggested that any value of the Mayer Multiple greater than 2.4 will not produce better results for the investor.
The threshold value of 2.4 is also motivated by observing the distribution of the MM over bitcoin’s history, which shows that a value of 2.4 or above is very rare. Traders can use the percentages associated with the historical values as a proxy for the probabilities of the market’s direction.
For instance, the Mayer Multiple has been higher than 0.95 roughly 66 percent percent of the time, suggesting that there is a 66 percent chance that the price will increase (or a 34 percent chance the price will decrease).
The indicator can also be used to identify bottoms in the bitcoin price, where recent bottoms were established when the MM was less than 0.60–0.50.
At present, we see a bottom has not yet formed in the Multiple, with the value currently around 0.78. We want to see a U-shaped (or V-shaped) reversal in the MM for confirmation that the Multiple has bottomed.
We could also wait for the MM to test its previous lows near 0.507 to enter a long-term position in BTC-USD. Once the MM has tested lows near 0.593–0.507 or displays higher highs, investors should hold onto their positions and exit only once the MM exceeds 2.4.
Summary
While the Mayer Multiple is a useful tool, applying it in isolation may not yield the best results.
There are two main signals given by the Mayer Multiple:
- Once BTC-USD exceeds a value of 2.4 for the Mayer Multiple, it has historically provided a good signal to sell bitcoin, as the metric has always returned to below 1.5.
- Buy bitcoin at any value below 2.4 with a long-term view to ‘HODL’. You could dollar cost average into bitcoin each week or month that BTC-USD is below 2.4.
The weakness of the Mayer Multiple is that it provides probabilities on how the price will behave based on prior price action (and historical price action is not a guide to the future). A low or falling Mayer Multiple value does not mean that a buy will be profitable. Instead, the metric outlines the likelihood that a position will be profitable, which increases as the Mayer Multiple falls in value.
Also, it is only useful on long-term timeframes and as a result, trading signals are not provided that often.
Therefore, traders should look to combine the Mayer Multiple with other indicators or strategies for stronger confirmation of a top or bottom in the price of bitcoin.
Disclaimer: This blog post is for informational purposes only and should not be taken as financial advice.
