Quant Explains How Bitcoin ‘ESR’ Can Act As Leading Indicator For Price

A quant has explained using on-chain data how the Bitcoin Exchange Stablecoins Ratio (ESR) may act as a leading indicator for the price.

Bitcoin ESR Has Shown Divergence From The Price Recently

As explained by an analyst in a CryptoQuant post, the ESR is acting as a leading metric for BTC and other coins in correlation with the cryptocurrency. The “ESR” is an indicator that measures the ratio between the Bitcoin exchange reserve and the exchange reserve of all stablecoins.

The “exchange reserve” here refers to the total amount of the given asset (or group of assets) that’s currently being stored in the wallets of all centralized exchanges.

Generally, whenever investors may temporarily want to escape the volatility associated with Bitcoin, they can choose to swap the coin for stablecoins, which show much fewer fluctuations in their value.

When these holders will eventually want to reenter a volatile market like BTC, they will usually deposit the coins into exchanges to make the shift back into their desired coin, and in the process, provide buying pressure on it.

Because of this reason, the exchange reserve of the stablecoins can serve as a measure of the current buying pressure in the market. On the contrary, the Bitcoin version of the metric may be looked at as a source of selling pressure, since holders usually use these platforms to sell their coins.

As the ESR compares both these indicators, the ratio can provide hints about whether there is a higher buying or selling pressure in the BTC market at the moment.

Now, here is a chart that shows the trend in this Bitcoin ratio over the last couple of years:

As you can see in the above graph, the analyst has highlighted some interesting trends between the Bitcoin ESR and the price of the asset. It looks like during the bull run in the second half of 2021 and the bear market in the first half of 2022, both these metrics were showing convergence.

This means that the price and the ESR were moving in sync, replicating each other’s movement to some degree. The quant has pointed out, however, that this pattern started to change as the bear market of 2022 went on.

With some major selloffs in the asset that took place in this period, the correlation between the Bitcoin ESR and the price broke, implying that these metrics were no longer moving in tandem.

Near the end of 2022, the ESR started climbing, while the price was moving sideways at the bear market lows. But with the start of 2023, the price also began to move up, following in the footsteps of the metric.

The Bitcoin ESR has continued to show divergence from the price like this and has been sharply going up toward a new all-time high. “In the current market structure, the ESR acts as a magnet to Bitcoin’s spot price,” explains the analyst.

The quant, however, also believes that this divergence will eventually shift back into being a convergence as BTC’s pre-halving accumulation cycle continues further.

BTC Price

At the time of writing, Bitcoin is trading around $28,100, up 5% in the last week.