The trend of Ethena reveals what information about the cryptocurrency market

Article Author: Kyle Soska

Article Compiled by: Block unicorn

The cryptocurrency market has been in a risk-off state for several months, and I have been carefully studying various market data to look for signs of a potential turnaround. In this article, I will delve into the market structure of perpetual futures and analyze market risk preferences using data provided by the Ethena transparency dashboard.

In short: Ethena's deployed capital is at its lowest point in years, only 71% of the low in 2025. This is not a criticism of Ethena but rather a reflection of the current market conditions. Directional short positions are nearly equal to directional long positions, which is an extremely rare and historically difficult-to-sustain balance in the cryptocurrency space.

The cryptocurrency market has long been characterized by the extreme volatility of its assets and the significant leverage used by traders. My previous research, "Understanding Cryptocurrency Derivatives: A Case Study of BitMEX," explored the new 100x perpetual contracts offered on BitMEX.

Since the BitMEX era, cryptocurrency futures have become the most traded products in the cryptocurrency market, with trading volumes 5 to 20 times that of the spot market. As a leveraged trading hub for retail investors, perpetual contracts can reflect the risk preferences of the cryptocurrency market, making them worthy of our attention.

Ethena provides us with an extremely unique perspective that allows us to gain deep insights into the cryptocurrency derivatives market. As shown in the figure below, Ethena has implemented cryptocurrency arbitrage trading. The strategy is simple: when cryptocurrency traders go long, Ethena acts as their counterparty and goes short. Ethena ensures that it buys the same amount of assets as the quantity that traders are shorting. In a sense, Ethena provides a form of leverage service. Traders want to profit from the rise of cryptocurrencies but lack capital; Ethena has the capital but limited risk tolerance. Therefore, traders use perpetual contracts to borrow funds from Ethena at the basis plus the financing cost of the perpetual contracts.

(Chart: Ethena Mechanism Illustration)

According to the structure of perpetual contracts, each long contract corresponds to a short contract, maintaining a 1:1 relationship. Each open perpetual contract represents a cash flow agreement between both parties. The role of the exchange is to facilitate the matching of these contracts, ensuring that each contract always has sufficiently funded long and short holders. The table below shows four possible outcomes of trades facilitated by the exchange.

Perpetual Contract Matching Matrix

Every trade has a buyer and a seller. When both the buyer and seller of the contract are long or both are short, the exchange simply transfers the ownership of the contract from one party to the other. This transfer does not create or destroy any contracts. When the buyer goes long and the seller goes short, a new contract must be created, with the buyer assuming the long position and the seller assuming the short position, increasing the open contract volume by 1. On the other hand, if the seller goes long and the buyer goes short, the exchange can directly cancel the contracts of the buyer and seller and remove the newly released contract, reducing the open contract volume by 1.

So, who are the actual holders of these contracts in a typical market? I believe contract holders can be primarily divided into four categories:

• [Long] Directional Longs

• [Short] Directional Shorts / Hedgers

  • a. Direct Asset Shorts / Hedgers

  • b. Structured Product Hedgers

• [Short] Basis Traders (e.g., Ethena, etc.)

• [Mixed] Perpetual Contract Arbitrageurs

Directional Longs seek exposure. They are risk seekers, and their demand for risk depends on their own risk tolerance.

Directional Short traders include both investors who wish to take on downside risk of assets and those who wish to hedge their own assets in a tax-efficient manner. Venture capital firms and employees of companies compensated with tokens often wish to hedge tokens that unlock at current prices. For altcoins, many markets have too low trading volumes to effectively hedge directly, or may not exist at all. In such cases, companies like Cumberland, Wintermute, FalconX, Flowdesk, and Amber can build dynamically managed synthetic positions, using short positions in highly correlated liquid assets like Bitcoin and Ethereum to hedge risks in less liquid markets (e.g., Monad). Projects like Neutrl also adopt this strategy, using such hedges as a yield strategy.

Basis Traders are opportunistic shorts. They are not interested in directional risk exposure but actively fill the excess demand for directional longs when market supply and demand are imbalanced. In most market mechanisms, long demand exceeds short demand, and the role of longs is to bridge the price gap. Their position sizes are typically highly elastic.

Perpetual Contract Arbitrageurs hold both long and short positions in perpetual contracts simultaneously. Their role is to connect different perpetual contracts and correct any minor price discrepancies, with costs not exceeding trading fees. Their long positions can perfectly match their short positions at any given time.

By construction, all perpetual contracts are in a 1:1 ratio, with long positions perfectly matching short positions, so we know:

Directional Longs + Arbitrage Longs = Directional Shorts + Basis Shorts + Arbitrage Shorts

Moreover, the structure of perpetual contract arbitrage tells us:

Arbitrage Longs = Arbitrage Shorts

After canceling this item from the first equation, we get:

Directional Longs = Directional Shorts + Basis Shorts

Ethena provides us with a proxy indicator for all basis shorts, which helps us gain deeper insights into the differences between directional longs and shorts.

The following figure is Ethena's self-reported balance sheet, divided by cash and deployed capital, covering the time range from December 27, 2024, to March 7, 2026:

(Chart: Ethena Balance Sheet 2024-2026)

In January 2025, the market sharply turned risk-off after the launch of the $TRUMP token, followed by a continued decline during the initial tariff discussions and the "Liberation Day" in April. During this period, Ethena's deployed capital plummeted from over $5 billion to around $1.108 billion, a drop of more than 75%.

It is important to note that Ethena's deployed capital can serve as a reference indicator for the extent of excess long demand in the market. While Ethena is not the only institution conducting such trades, its large scale (sometimes around 25% of Binance and Bybit) means that as long as it has ample cash, it will expand its positions to meet any unmet long demand. This indicates that while total long demand may not have decreased by 75% by April 2025, the excess demand that was not closed by directional shorts did indeed decrease by 75%.

The following figure shows Ethena's balance sheet relative to its total scale, the lowest and highest values in 2025.

(Chart: Ethena Deployment Comparison)

Observing the current market, Ethena has deployed a total of approximately $791 million across all markets (BTC, ETH, SOL, BNB, XRP, HYPE). This is equivalent to 71% of the 2025 low and only 12.9% of the highest value before October 10. This figure is not a denial of Ethena but rather reflects the current market conditions: net long demand is at a historical low.

Notably, during the market crash when Bitcoin's price plummeted to $60,000, Ethena deployed over $2 billion in capital. Since just a month ago, on February 8, 2026, Ethena's deployed capital has astonishingly decreased by 60%!

The following figure zooms in on Ethena's deployed capital and the price trend of Bitcoin since January of this year.

(Chart: Ethena Deployed Capital vs. Bitcoin Price Trend 2026)

Since Bitcoin's price dropped to $60,000, Ethena's basis positions have shrunk by over 60%, from over $2 billion to less than $800 million. This change is perplexing, as the market has been relatively stable during this period. The reasons for this include:

1. Profitable but unsustainable basis trades established after the February crash (the basis has turned negative, but the funding rate is also negative) are gradually being closed.

2. Increased hedging activities from directional shorts and price-insensitive participants, squeezing the market space for opportunistic basis traders.

3. Insufficient long demand seeking leveraged exposure.

(Chart: Open Contracts vs. Funding Rate Trend)

In my view, the truth is primarily determined by factors 1 and 2, with factor 3 having a negligible impact. As shown in the above chart, during this period when Ethereum projects gradually exited, the overall open contract volume of Bitcoin (and other mainstream cryptocurrencies) remained relatively stable. Meanwhile, the funding rate has been in a prolonged negative state, with many cryptocurrencies (e.g., SOL) showing cumulative negative funding rates across multiple exchanges. This indicates that the market's demand for shorting or hedging certain risk exposures is increasing.

If I had to guess, I believe that small and medium-sized cryptocurrency companies and venture capital firms are facing a crisis. Think of small-cap projects like Eigen, Grass, Monad, etc. There are hundreds of such cryptocurrencies, each representing dozens of venture capital firms and a company with capital and employees. Venture capital firms need to control losses and lock in profits to meet their fund's investment goals, while these companies need to ensure cash flow and employee numbers. This creates a situation where all participants want to extract maximum benefit from the "stone," and the answer is through relatively crowded trading of actively managed structured products that short a basket of related assets.

We saw the presence of these structured products during Ethereum's explosive rise, which also triggered a short covering rally for many small and medium-sized cryptocurrencies. Another piece of evidence is that opportunistic basis trading like that of Ethena has been significantly squeezed out.

Whatever the specific reasons may be, we can be certain that this is the first time in cryptocurrency market history that directional longs and directional shorts have nearly reached a state of equilibrium. There is no compelling reason to suggest that this state cannot become the new normal, nor is there evidence that this market structure must change, but looking across other asset classes and markets, it is very unusual for such a trend to persist.