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 Sharply Ascend In Recent Weeks
As explained by an analyst in a CryptoQuant post, the ESR is currently acting as a leading indicator for BTC’s price. A relevant metric here is the “exchange reserve,” which measures the total amount of a cryptocurrency that’s currently sitting in the wallets of all centralized exchanges.
The “ESR” is an indicator that tells us about the ratio between the exchange reserve for Bitcoin and that for the combined stablecoins market (both denominated in USD).
Generally, investors shift assets like BTC into stables whenever they want to escape the volatility associated with the former. When holders like these eventually want to switch back into the volatile markets, they deposit their stablecoins into exchanges to do so.
The coins they exchange their stables for naturally feel a buying pressure from the conversion. Because of this reason, the stablecoin exchange reserve may be looked at as the “available buying power” for other cryptocurrencies like BTC.
The exchange reserve for Bitcoin itself, however, represents the selling supply in the market, as investors generally deposit their BTC into these platforms for selling purposes.
Now, here is a chart that shows the trend in the BTC ESR over the last year:
Looks like the value of the metric has rapidly risen in recent weeks | Source: CryptoQuant
According to the quant, the Bitcoin price and ESR were showing convergence during the year 2021, meaning that the two curves were moving in close tandem. This convergence continued in early 2022, as the chart above displays.
However, the convergence broke with the 3AC bankruptcy in June of that year, as the price of the asset plummeted, but the ESR didn’t register any significant fluctuations at all.
In late 2022, a positive divergence started forming between the two lines, as the 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 following in the direction of the indicator, as it began its rally. The ESR has continued to sharply climb since then, while BTC has also generally observed strong upwards momentum.
An interesting trend was seen back at the beginning of March when the ESR had taken a plunge. Not too long after this drawdown in the indicator occurred, the BTC price also plummeted down.
But while this decline in the price was happening, the metric had already reversed back to an uptrend. As it turned out, the cryptocurrency also did the same after finishing its drop. “In the current market structure, ESR acts as a magnet to Bitcoin’s spot price,” explains the analyst.
Earlier this month, the ESR again observed some decline, but it wasn’t long before the metric reversed its trend and resumed the upward trajectory. Recently, BTC has also been plunging, as its 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, in order to mimic what the ESR has been doing.
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