On-Chain Stablecoin, Profitability Ratios Signal Investor Caution

The recent increase in bitcoin's price shows investors positioning themselves for a potential price downturn.

AccessTimeIconMar 28, 2023 at 7:28 p.m. UTC
Updated Mar 28, 2023 at 7:46 p.m. UTC

An on-chain measure of stablecoins versus bitcoin (BTC) held by exchanges indicates the appetite for the largest cryptocurrency by market capitalization could be waning.

The Exchange Stablecoins Ratio (ESR), an indicator that divides bitcoin exchange reserves by the number of stablecoins on exchanges, has risen to its highest level since May 2021.

The CryptoQuant metric acts as a measure of buying power. When the ESR declines, the number of stablecoins on exchange is increasing relative to bitcoin reserves. When the ratio increases, the opposite is the case.

As stablecoins serve as a primary mechanism for purchasing crypto assets, a lower ratio equates to more buying power.

Bitcoin Exchange Stablecoins Ratio (CryptoQuant)
Bitcoin Exchange Stablecoins Ratio (CryptoQuant)

The recent increase in the ratio implies that investors are moving fewer stablecoins to exchanges and more bitcoin, or they are doing both simultaneously.

Both would indicate potential selling pressure as investors fret about the current investment environment following several U.S. bank failures and increased regulatory scrutiny of crypto. Investors often move crypto assets to exchanges for the purpose of selling. They move stablecoins to exchanges when bullish sentiment is increasing.

The timing of the relative decline in stablecoin supply coincides with a 34% increase in BTC's price since March 10, but that was largely before conditions worsened.

Theoretically, if investors felt that more gains were to be had following a price increase, the stablecoin volume to exchanges would increase.

The sharp increase in the ratio following bitcoin’s price increase implies investors at the very least have positioned themselves to take profits quickly, should an event cause the bitcoin’s price to drop suddenly.

An example of such an event was the Commodity Futures Trading Corporation (CFTC) lawsuit against Binance and its CEO, Changpeng Zhao. The filing was followed by a big BTC price drop in the ensuing hours.

BTC fell 2.84% on Monday, and is most recently down an additional 0.55%..

A second on-chain indicator is signaling investor caution as well. The Adjusted Spent Output Profit (aSOPR) ratio measures the extent to which bitcoin investors are selling at a profit or loss.

The metric indicates that investors are selling at a profit when its reading exceeds 1.0, and that investors are selling at a loss when it falls below 1.0.

The current reading of 1.0452 indicates the former. While selling an asset at a profit is generally viewed positively, taking profits in the middle of an increase in asset prices could signal concerns that the increase will stall.

Bitcoin Adjusted Output Profit Ratio (CryptoQuant)
Bitcoin Adjusted Output Profit Ratio (CryptoQuant)

Edited by James Rubin.


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Glenn Williams

Glenn C Williams Jr, CMT is a Crypto Markets Analyst with an initial background in traditional finance. His experience includes research and analysis of individual cryptocurrencies, defi protocols, and crypto-based funds. He owns BTC, ETH, UNI, DOT, MATIC, and AVAX