Author: Kyle Soska, Chief Investment Officer of Ramiel Capital

Translation: Felix, PANews

The cryptocurrency market has been in a risk-averse state for several months, and Ramiel Capital's Chief Investment Officer Kyle Soska has been carefully analyzing various market data to look for signs of a potential turnaround. This article will explore the market structure of perpetual contracts and analyze market risk preference using data provided by Ethena's transparency dashboard.

For a long time, the characteristics of the cryptocurrency market have been high asset volatility and a widespread use of high leverage by traders. Perpetual contracts have become the most traded product in the cryptocurrency sector, with trading volumes 5 to 20 times larger than the spot market. As a central hub for retail leverage in the market, it makes sense to gauge the risk appetite for cryptocurrencies through perpetual contracts.

Particularly, Ethena provides a unique window into observing the cryptocurrency derivatives market. As shown in the figure below, Ethena realizes “cryptocurrency arbitrage trading.” The strategy is simple: when cryptocurrency traders go long, Ethena acts as their counterparty and goes short. Then, Ethena ensures that it purchases assets equivalent to its short position.

In a sense, Ethena offers “leverage as a service.” Traders want to profit from rising cryptocurrencies but lack funds, while Ethena has capital but limited risk tolerance, so traders borrow this capital from Ethena through perpetual contracts at a cost of “basis + funding rate.”

Source: ethena.fi

According to the structure of perpetual contracts, every long position corresponds to a short position at a ratio of 1:1. Each open contract in perpetual contracts represents an 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 of exchange matching.

Perpetual Contract Matrix

Every trade involves a buyer and a seller. When both the buyer and the seller of a contract go long or short, the exchange simply transfers ownership of the contract from one party to the other. This transfer does not create or destroy any contracts. When the buyer goes long while the seller goes short, a new contract must be created, with the buyer holding a long position and the seller holding a short position, increasing the open contract volume by 1. Conversely, if the seller closes a long and the buyer closes a short, the exchange can directly sever the association of the buyer and seller with the contract and delete the newly released contract, decreasing the open contract volume by 1.

So, who really owns these contracts in a typical market? I believe there are mainly four categories:

1. (Long) Directional Longs

2. (Short) Directional Shorts / Hedgers

• a. Direct Asset Shorts / Hedges

• b. Structured Product Hedges

3. (Short) Basis Traders (Ethena and others)

4. (Mixed) Perpetual Contract Cross-Platform Arbitrageurs

Directional longs hope to gain exposure. They pursue risk, and their risk demand depends on their risk appetite.

Directional shorts consist of various participants, including those seeking exposure to asset declines and those hoping to hedge their held assets in a tax-efficient manner. Venture capital firms (VCs) and company employees compensated in tokens often wish to hedge unlocking tokens at the current price. In terms of altcoins, many markets lack sufficient liquidity for effective direct hedging, or hedging tools simply do not exist. In such cases, firms like Cumberland, Wintermute, FalconX, Flowdesk, and Amber can create dynamically managed synthetic positions using short positions in high liquidity assets like Bitcoin and Ethereum to hedge exposure in low liquidity markets like Monad. This also includes projects like Neutrl, which incorporate such hedging as a revenue strategy.

Basis traders are speculative shorts. They are not interested in directional exposure but actively fill the excess demand of directional longs when the market is imbalanced. In most market environments, demand for longs exceeds demand for shorts, and their role is to fill that gap. Their ability to increase or decrease their positions is usually highly flexible.

Perpetual contract cross-platform arbitrageurs simultaneously hold both long and short positions in perpetual contracts. Their role is to connect different perpetual contract tools and correct minor price discrepancies within the range of trading fee costs. Their longs are always fully matched with their shorts at any given time.

By construction, each perpetual contract is 1:1 and matches longs with shorts; therefore:

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

Moreover, the structure of perpetual contract arbitrage shows:

Arbitrage Longs = Arbitrage Shorts

By offsetting this item from the first equation, we obtain:

Directional Longs = Directional Shorts + Basis Shorts

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

The figure below shows Ethena's self-reported balance sheet, divided into cash and deployed capital (from December 27, 2024, to March 7, 2026):

In 2025, after the January $TRUMP token launch, market sentiment sharply shifted to risk aversion and continued to decline until the tariff negotiations and the eventual "Liberation Day" in April. During this period, Ethena's deployed capital plummeted from over $5 billion to just $1.108 billion, a decline of over 75%.

It is important to note that Ethena's deployed capital is a proxy for the market's excess long demand. While Ethena is not the only entity executing these trades, its scale is massive (sometimes representing about 25% of Binance and Bybit), and as long as they have surplus cash, they should expand their balance sheets to fill any unmet long demand. This suggests that while the total demand for long exposure may not have decreased by 75% in April 2025, the excess demand that was not filled by directional shorts indeed dropped.

The following figure shows the deployment of Ethena's balance sheet in relation to its total scale, the 2025 lows, and the 2025 highs.

Observing today's market, Ethena has deployed only $790 million (791,241,545.6 dollars) across all markets (BTC, ETH, SOL, BNB, XRP, HYPE). This is 71% of the 2025 lows, only 12.9% of the previous highest level prior to October 10. This number is not a negation of Ethena but reflects the current market condition: net demand from longs is at a historical low.

In particular, during the market crash when Bitcoin fell to $60,000, Ethena's deployed capital exceeded $2 billion. Since February 8, 2026 (one month ago), its deployed capital has plummeted by an astonishing 60%.

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

Since Bitcoin dipped 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 has been relatively stable during this period. Several explanations exist for this:

1. The gradual closure of profitable but unsustainable basis trades created post the crash in February (the basis has moved to favorable negative values, but the funding rate is also negative).

2. Competition from directional shorts and hedging activities from price-insensitive participants, squeezing out speculative basis traders.

3. A lack of demand from longs seeking leveraged exposure.

Source: Coinglass

I believe that the reality is mainly a combination of factors 1 and 2, with little influence from factor 3. As shown in the graph above, during Ethena's liquidation, the total open contract volume of Bitcoin (and other major coins) remained relatively stable. Meanwhile, the funding rates have been negative for a long time, and many coins like SOL show negative cumulative funding rates across multiple exchanges. This indicates that the demand for directional shorts or hedging a specific risk is increasing.

I believe that small crypto companies and VCs are all experiencing a crisis. Consider small-cap projects like Eigen, Grass, and Monad; each of these tokens represents dozens of VCs and companies with treasuries and employees. VCs need to limit losses and lock in profits to meet investment goals, while companies need to protect their cash flow and workforce. This creates a situation where all parties want to extract maximum benefits from limited resources, leading to a relatively crowded trading form: shorting a basket of related assets through actively managed structured products.

We saw some evidence of these structured products during the explosive rallies of ETH, which triggered short covering rebounds in many small to medium-sized crypto assets. Another piece of evidence is that speculative basis trading like that of Ethena has been heavily squeezed out.

Whatever the cause, it is clear that the long and short positions in the cryptocurrency market are nearly balanced, a historical first. While there is no reason to believe this cannot become the new norm, or that this situation needs to change, it is rare for such a trend to persist across other asset classes and markets.

Further Reading: Ethena after Decoupling Turmoil: TVL Halved, Ecosystem Struggling, How to Start the Second Growth Curve?

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