Chart of the Week | Volatility Adjusted Mayer Multiple

Good morning everyone and welcome to our inaugural “Chart of the Week” series!

Starting this week, we’ll be providing you with the most informative Bitcoin charts, sent directly to your inbox every Wednesday morning. Each chart will feature a few short, actionable insights to help keep you informed and up to date on a the most unique datapoints across Bitcoin’s ecosystem.

This week we dive into the Volatility Adjusted Mayer Multiple which helps smooth the traditional Mayer Multiple to account for Bitcoin’s price volatility. Let’s get to it!

The age-old adage in markets of ‘buy low, sell high’ is known for its simplicity, but can be difficult to implement, in practice. How does one know what is “high”, and what is “low”?

In investing, everything comes down to risk/reward calculations, and you generally want to minimize your downside risk and maximize the profit potential. The last thing you want to do is buy an asset at its peak price, just to have it decline on you after purchasing it.

The Traditional Bitcoin Metric

Enter the Mayer multiple, which is one such way for investors to gauge the relative strength of an asset compared to its average price over a given time period. Investors have used moving averages (“MA”) for decades, with some of the most common intervals being: 50 days, 100 days and 200 days, though some very short-term traders may use even smaller time frame MA’s.

If you are looking to hold an asset for a longer period of time, the longer moving averages (100 or 200 days) would generally be of more use, as they indicate longer-term trends that are typically more powerful and noteworthy than short-term price vacillations.

Intraday volatility may move a short-term MA like a 5MA, but would not be reflected in a longer-term moving average like a 200MA which makes a 200MA useful for an investor looking to make a longer-term investment.

The Mayer Multiple itself is a fairly basic metric. It simply takes the current price of Bitcoin, then divides it by the average price of that asset over the prior 200 day interval. The further the current price is above the historical average (in this case, the preceding 200 days), the higher the multiple, and therefore, the more “extended” an asset is.

Why is the Mayer Multiple Useful?

History would suggest that these are times to avoid buying, and think about taking profits. Conversely, if you are a very long-term investor who plans on never selling an asset, the way you would compound your returns is by buying the dips, which are reflected in a low multiple. This is how exponential, compounding returns are generated on longer time frames.

The Mayer Multiple is especially useful, as bitcoin is well-known for its high volatility. Investors who are not accustomed to a ‘normal’ intraday move of over 5%, need to pay extra attention to their entry points, otherwise, they may quickly see significant unrealized losses which may shake an investor’s confidence.

In fact, it’s important to point out that it’s precisely this volatility that makes the returns on bitcoin so much higher than traditional asset classes like equities. The volatility of bitcoin is a ‘feature, not a bug’, and can lead to extraordinary returns when captured.

Why Adjust for Volatility?

However, this volatility can result in technical signals (such as the Mayer Multiple) giving false signals. As investors, we are able to access immense amounts of data nowadays. Picking useful signals out of the noise becomes an increasingly difficult challenge. This is why adjusting metrics for volatility is important (see orange lines below which flatten out volatility over time).

Bitcoin, being an asset that behaves according to a ~4 year supply cycle, is known for it’s massive, parabolic upside moves which are generally followed by a prolonged period of downside price action. This makes timing the entry all the more important, to avoid finding yourself on the wrong side of a >1 year period of price decline.

Ok… So What?

The historical data has consistently shown that buying bitcoin when the volatility-adjusted Mayer Multiple is below 1 almost always leads to very little (if any) downside, and huge returns in the years following (green circles below).

Zooming further in, the Volatility Adjusted Mayer Multiple proves even more useful, with levels above 3 usually being followed (in the near-term) by price declines. Investment horizon is important, as someone investing for multiple decades, will find that any price is a good investment over the long term provided that the asset’s price continues to rise.

However, as mentioned before, the best way to compound gains is to strategically time purchases. Over the past few years, it’s clear that Mayer Multiple below one, mark amazing buying opportunities.

That’s it from us this week - remember, stay humble and stack sats!