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

Keshav Verma

1 year ago

3 mins read

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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:

The value of the metric seems to have been sharply going up in recent days | Source: CryptoQuant

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.

BTC seems to have overall moved sideways recently | Source: BTCUSD on TradingView

Featured image from Dmitry Demidko on Unsplash.com, charts from TradingView.com, CryptoQuant.com

Keshav Verma

Keshav is currently a senior writer at NewsBTC and has been attached to the website since June 14, 2021.

Keshav has been writing for many years, first as a hobbyist and later as a freelancer. He has experience working in a variety of niches, even fiction at one point, but the cryptocurrency industry has been the longest he has been attached to.

In terms of official educational qualifications, Keshav holds a bachelor’s degree in Physics from one of the premier institutes of India, the University of Delhi (DU). He started the degree with an aim of eventually making a career in Physics, but the onset of COVID led to a shift in plans. The virus meant that the college classes had to be delivered in the online-mode and with it came free time for him to explore other passions.

Initially only seeking to make some beer money, Keshav unexpectedly landed clients offering real projects, after which there was no looking back. Writing was something he had always enjoyed and to be able to do it for a living was like a dream come true.

Keshav completed his Physics degree in 2022 and has been focusing on his writing career since, but that doesn’t mean his passion for Physics has ended. He eventually plans to re-enter university to obtain a masters degree in the same field, but perhaps only to satiate his own interest rather than for using it as a means to find employment..

Keshav has found blockchain and its concepts fascinating ever since he started going down the rabbit-hole back in 2020. On-chain analysis in particular has been something he likes to research more about, which is why his NewsBTC pieces tend to involve it in some form.

Being of the science background, Keshav likes if concepts are clear and consistent, so he generally explains the indicators he talks about in a bit of detail so that the readers can perhaps come out having understood and learnt something new.

As for hobbies, Keshav is super into football, anime, and videogames. He enjoys football not only as a watcher, but also as a player. For games, Keshav generally tends towards enjoying singleplayer adventures, with EA FC (formerly FIFA) being the only online game he is active in. Though, perhaps due to being ultra-focused on the game, he is today a semi-pro on the EA FC scene, regularly participating in tournaments and sometimes even taking back prize money.

Because of his enthusiasm for anime and games, he also self-learned Japanese along the way to consume some of the untranslated gems out there. The skill didn’t merely remain as just a hobby, either, as he put it to productive use during his exploration for small-time gigs at the start of COVID, fulfilling a couple of Japanese-to-English translation jobs.

Keshav is also big into fitness, with agility and acceleration-related workouts making a big part of his program due to the relevance they have in football. On top of that, he also has a more traditional strength based program for the gym, which he does to maintain an overall fitness level of his body.

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