Bitcoin ‘ESR’ Continues to Show Bullish Divergence, Will Price Follow?

Bitcoin on-chain indicator Exchange Stablecoin Ratio (ESR) has continued to show bullish divergence recently. Will the price also mimic this?

Bitcoin ESR has continued to rise sharply in recent weeks

As explained by an analyst in a CryptoQuant post, ESR currently serves as a leading indicator for BTC’s price. A relevant metric here is the “exchange reserve”, which measures the total amount of a cryptocurrency currently sitting in the wallets of all centralized exchanges.

“ESR” is an indicator that tells us the ratio of the currency reserve of Bitcoin to that of the combined stablecoin market (both denominated in USD).

Generally speaking, investors move assets like BTC to stables when they want to escape the volatility associated with the former. When holders like these eventually want to switch back to the volatile markets, they deposit stablecoins on exchanges to do so.

The coins they exchange the stable for naturally feel a buying pressure from the conversion. Due to this reason, the stablecoin exchange reserve can be seen as “available purchasing power” for other cryptocurrencies such as BTC.

However, the exchange reserve for Bitcoin itself represents the selling offer in the market, as investors generally deposit BTC on these platforms for selling purposes.

Now, here is a chart showing the trend of BTC ESR over the past year:

Looks like the value of the metric has rapidly risen in recent weeks | Source: CryptoQuant

According to the quant, Bitcoin price and ESR showed convergence during the year 2021, which means the two curves moved closely together. This convergence continued into early 2022, as the chart above shows.

However, the convergence broke with the 3AC bankruptcy in June of the same year, when the price of the asset fell, but the ESR did not register any significant fluctuations at all.

In late 2022, a positive divergence began to form between the two lines as ESR began to climb while Bitcoin continued to move sideways around the post-FTX crash lows.

In January of this year, the BTC price also finally started to follow the direction of the indicator, as it began its rally. ESR has continued to climb strongly since then, while BTC has also generally observed strong upward momentum.

An interesting trend was seen back in early March when the ESR had made a move. Not too long after this decline in the indicator occurred, the BTC price also fell.

However, while this decline in price was occurring, the calculation had already reversed back to an upward trend. As it turned out, the cryptocurrency also did the same after completing its release. “In the current market structure, ESR acts as a magnet on Bitcoin’s spot price,” the analyst explains.

Earlier this month, the ESR again observed some decline, but it did not take long for the metric to reverse its trend and resume its upward trajectory. Recently, BTC has also plunged, as the price has now gone below the $28,000 level.

If the pattern that followed earlier is anything to go by, this divergence between the two lines should mean that BTC will also reverse its current decline, to mimic what ESR has done.

BTC price

At the time of writing, Bitcoin is trading around $27,600, down 6% in the last week.

BTC has plunged in the last few days | Source: BTCUSD on TradingView

Featured Image by Kanchanara at Unsplash.com, Charts by TradingView.com, CryptoQuant.com