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 turning point. In this article, I will delve into the market structure of perpetual futures and analyze market risk appetite using data provided by the Ethena transparency dashboard.

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

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

Since the era of BitMEX, cryptocurrency futures have become the most traded product in the cryptocurrency market, with trading volumes 5 to 20 times that of the spot market. As a leverage trading hub for retail investors, perpetual contracts can reflect the risk appetite of the cryptocurrency market and are therefore worth 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 achieves cryptocurrency arbitrage trading. The strategy is simple: when cryptocurrency traders go long, Ethena acts as their counterparty to go short. Ethena ensures that the amount of assets bought matches exactly the quantity sold short by the trader. In a sense, what Ethena offers is a leverage service. Traders wish to profit from the rise of cryptocurrencies but lack capital; Ethena has capital but limited risk tolerance. Thus, 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 construction of perpetual contracts, each long contract corresponds to a short contract, with a 1:1 ratio. Each outstanding perpetual contract represents a cash flow agreement between the two parties. The role of the exchange is to facilitate the matching of these contracts, ensuring that each contract always has well-capitalized long and short holders. The table below shows four possible outcomes facilitated by the exchange.

Perpetual Contract Matching Matrix

Every transaction has a buyer and a seller. When both the buyer and seller of the contract are long or both are short, the exchange merely transfers ownership of the contract from one party to another. 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 taking on a long position and the seller taking on a short position, increasing the outstanding contract quantity by 1. Conversely, if the seller goes long and the buyer goes short, the exchange can directly cancel the contracts of both parties and remove the newly released contracts, decreasing the outstanding contract quantity by 1.

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

• [Long] Directional longs

• [Short] Directional shorts / Hedging

  • a. Direct asset shorts / Hedging

  • b. Structured product hedging

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

• [Mixed] Perpetual contract arbitrageurs

Directional longs seek exposure. They are risk seekers whose demand for risk depends on their own level of risk appetite.

Directional shorts include investors looking to bear asset downside risk as well as investors who want to hedge their own assets in a tax-efficient manner. Venture capital firms and employees at companies compensated with tokens often wish to hedge tokens that are unlocked at current prices. In the case of altcoins, many markets have insufficient trading volumes to effectively hedge directly, and some may not exist at all. In such cases, companies like Cumberland, Wintermute, FalconX, Flowdesk, and Amber can build dynamically-managed synthetic positions, hedging the risk exposure of less liquid markets (such as Monad) by shorting highly correlated liquid assets like Bitcoin and Ethereum. Projects like Neutrl also adopt this strategy, considering such hedging as a yield strategy.

Basis traders are opportunistic shorts. They are not interested in directional risk exposure but actively fill the excess demand from directional longs when there is an imbalance in market supply and demand. Under most market mechanisms, long demand exceeds short demand, and the role of longs is to fill price gaps. Their positions are often 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 transaction fees. Their long positions are perfectly matched with short positions at any moment.

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

In addition, the structure of perpetual contract arbitrage informs us:

Arbitrage longs = Arbitrage shorts

Subtracting this from the first equation gives us:

Directional longs = Directional shorts + Basis shorts

Ethena provides us with a proxy indicator for all basis shorts, helping us gain 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, for the period from December 27, 2024, to March 7, 2026:

(Chart: Ethena balance sheet 2024-2026)

The market sharply shifted to a risk-off sentiment in January 2025 after the $TRUMP token was launched, continuing to 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 just around $1.108 billion, a decline of over 75%.

It is noteworthy that Ethena's deployed capital can serve as a reference indicator of the extent of excess market long demand. Although Ethena is not the only institution engaging in such trading, its large scale (sometimes about 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 suggests that while total long demand may not have decreased by 75% by April 2025, the excess demand that was not closed out by directed shorts indeed fell by 75%.

The following figure shows Ethena's deployment relative to its total size, 2025 lows, and highs.

(Chart: Comparison of Ethena deployment)

Observing the current market, the total amount of funds deployed by Ethena across all markets (BTC, ETH, SOL, BNB, XRP, HYPE) is only about $791 million. This corresponds to 71% of the 2025 low and is only 12.9% of the highest value before October 10. This figure is not a negation of Ethena but reflects the current market condition: 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 funds. Since just a month ago on February 8, 2026, Ethena's deployed capital has astonishingly decreased by 60%!

The following figure zooms in to show Ethena's deployed capital alongside the price trends of Bitcoin since January this year.

(Chart: Ethena deployed capital vs Bitcoin price trend 2026)

Since Bitcoin's price fell to $60,000, Ethena's basis position has shrunk by over 60%, from over $2 billion to less than $800 million. This change is puzzling, as the market was relatively stable during this period. Several reasons contribute to this situation:

1. Profiting but unsustainable basis trades established after the plunge in February (the basis has turned negative, but financing rates are also negative) are gradually being closed out.

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

3. Insufficient demand from longs seeking leveraged exposure.

(Chart: Outstanding contracts vs financing rate trend)

In my view, the truth is mainly determined by factors 1 and 2, with factor 3 having minimal impact. As the above figure shows, during this period of gradual exit of Ethereum projects, the overall outstanding contracts for Bitcoin (and other major cryptocurrencies) remained relatively stable. Meanwhile, financing rates have remained negative for a long time, with many cryptocurrencies (e.g., SOL) experiencing cumulative negative financing rates across multiple exchanges. This indicates an increasing demand in the market to short or hedge certain risk exposures.

If I were to speculate, I believe that small and medium-sized cryptocurrency companies and venture capital firms are facing a crisis. Consider 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 investment goals, while these companies need to ensure cash flow and staffing. This creates a situation where all participants seek to extract the maximum benefit from the "stone," and the answer is through relatively crowded trading in actively managed structured products that short a basket of correlated assets.

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

Whatever the specific reasons may be, we can be sure that this is the first time in cryptocurrency market history that directional longs and directional shorts have nearly balanced out. There is no sufficient reason to suggest that this state cannot become the new norm, nor is there evidence that this market structure must change, but looking at other asset classes and markets, it is very unusual for this trend to sustain.