Quant explains how Bitcoin ‘ESR’ can act as a leading price indicator
A quant has explained using on-chain data how the Bitcoin Exchange Stablecoins Ratio (ESR) can act as a leading indicator of price.
Bitcoin ESR has shown divergence from the price recently
As explained by an analyst in a CryptoQuant post, ESR serves as a leading metric for BTC and other coins in accordance with the cryptocurrency. “ESR” is an indicator that measures the ratio of the Bitcoin exchange reserve to the currency reserve of all stablecoins.
The “exchange reserve” here refers to the total amount of the given asset (or group of assets) currently being stored in the wallets of all centralized exchanges.
Usually, when investors want to temporarily escape the volatility associated with Bitcoin, they can choose to exchange the coin for stable coins, which show much less fluctuations in value.
When these holders eventually want to enter a volatile market like BTC, they will usually deposit the coins on exchanges to make the switch back to the desired coin, and in the process add buying pressure to it.
For this reason, the exchange reserve of stablecoins can serve as a measure of the current buying pressure in the market. On the contrary, the Bitcoin version of the metric can be seen as a source of selling pressure, since holders usually use these platforms to sell their coins.
As ESR compares both of these indicators, the ratio can give hints as to whether there is higher buying or selling pressure in the BTC market at the moment.
Now, here is a chart showing the trend of this Bitcoin ratio over the last couple of years:
The value of the metric seems to have been sharply going up in recent days | Source: CryptoQuant
As you can see in the graph above, the analyst has highlighted some interesting trends between Bitcoin ESR and the price of the asset. It appears that during the bull run in the second half of 2021 and the bear market in the first half of 2022, both of these metrics showed convergence.
This means that the price and ESR moved in sync, replicating each other’s movement to some extent. However, the quant has pointed out that this pattern began to change as the 2022 bear market continued.
With some large selling of the asset taking place during this period, the correlation between Bitcoin ESR and price broke, suggesting that these metrics were no longer moving in sync.
Near the end of 2022, the ESR began to climb, while the price moved sideways at the bear market low. But with the start of 2023, the price also started to move up, following in the footsteps of the metric.
Bitcoin ESR has continued to show deviations from price like this and has risen sharply towards a new all-time high. “In the current market structure, ESR acts as a magnet on Bitcoin’s spot price,” the analyst explains.
However, the quant also believes that this divergence will eventually shift back to being a convergence as BTC’s pre-halving accumulation cycle continues.
BTC price
At the time of writing, Bitcoin is trading around $28,100, up 5% in the past week.
BTC seems to have overall moved sideways recently | Source: BTCUSD on TradingView
Featured image from Dmitry Demidko at Unsplash.com, Charts from TradingView.com, CryptoQuant.com
