Bitcoin Crash Warning: CryptoQuant CEO Sees LUNA-Like Risks Ahead
April 05 2024 - 4:00AM
NEWSBTC
Ethena Labs has revealed its latest strategic move: the inclusion
of Bitcoin (BTC) as collateral for its synthetic dollar-pegged
product, USDe. This decision, aimed at significantly scaling the
product’s supply from its current $2 billion, capitalizes on the
burgeoning BTC derivative markets for enhanced scalability and
liquidity in delta hedging practices. Ethena Labs’ ambitious goal
is to leverage the considerable growth of BTC open interest, which
has seen a substantial rise from $10 billion to $25 billion in just
one year, far outpacing Ethereum’s (ETH) growth rates. Ethena’s
statement highlighted the strategic benefits of integrating BTC,
emphasizing the superior liquidity and duration profile of Bitcoin
compared to liquid staking tokens and the potential for USDe to
achieve greater scalability as a result “With $25bn of BTC open
interest readily available for Ethena to delta hedge, the capacity
for USDe to scale has increased >2.5x,” the announcement noted,
illustrating the robust backing that BTC provides. Excited to
announce that Ethena has onboarded BTC as a backing asset to USDe
This is a crucial unlock which will enable USDe to scale
significantly from the current $2bn supply
pic.twitter.com/FOZRWBrVZV — Ethena Labs (@ethena_labs) April 4,
2024 CryptoQuant CEO Issues Bitcoin Crash Warning This move has not
been met without skepticism. Ki Young Ju, CEO of the analytics firm
CryptoQuant, took to X to voice his concerns, drawing parallels to
the infamous LUNA collapse and questioning the risk management
strategies employed by Ethena Labs. “This isn’t good news for
Bitcoin holders—it sounds like a potential contagion risk, like
LUNA. How do they maintain a delta-neutral strategy for BTC in bear
markets?” Ju queried, implying that the success of such strategies
is largely contingent on market conditions that favor bull runs.
Related Reading: Bitcoin Bulls Roar: Analysts Predict Surge To
$82,000 Amid Bullish Pennant Formation He further elaborated on the
complexities of shorting BTC in bear markets, suggesting that the
market size for such operations could be smaller than the total
value locked (TVL), potentially leading to significant market
disruptions. The CryptoQuant CEO stated: How do they maintain a
delta-neutral strategy for BTC in bear markets? In bull markets,
they hold spot BTC and short BTC. If there’s a method to short BTC
by holding some DeFi-wrapped BTC, the market size would be smaller
than its TVL. This is a CeFi stablecoin run by a hedge fund,
effective only in bull markets. Correct me if I’m wrong. Ju added
that he’S concerned about a repeat of a LUNA-like doom scenario:
“selling BTC to stabilize USDe’s peg if their algorithm fails
during bear markets.” Adding to the discourse, OMAKASE, a former
advisor for Sushiswap, referenced historical challenges faced by
delta-neutral strategies, highlighting their propensity to turn
illiquid and the difficulty in unwinding such positions without
causing market slippage. Related Reading: US Govt Moves $90 Million
in Bitcoin, ETH From Estonian Scammers “Delta neutral strategies
are usually never delta neutral. Post dot-com boom in Singapore, it
took years for banks to unwind delta neutral books that had
suddenly turned illiquid. Size begets slippage,” OMAKASE remarked,
underscoring the inherent risks of such financial maneuvers. The
industry’s reaction to Ethena Labs’ announcement has been mixed,
with some lauding the potential for increased scalability and
others cautioning against the risks of replicating past financial
crises. A few days ago, Fantom founder Andre Cronje also questioned
the stability of USDe. Amidst these concerns, Ethena Labs stands by
its decision, pointing to the advantageous market conditions and
the growing BTC derivative markets as key factors supporting their
strategy. “While BTC does not possess a native staking yield like
staked ETH, staking yields of 3-4% are less significant in a bull
market when funding rates are >30%,” the company stated,
indicating a strategic optimization for the current market
environment. This move, according to Ethena, is not just about
scaling but also about offering a safer and more robust product to
its users. At press time, BTC traded at $67,018. Featured image
created with DALL·E, chart from TradingView.com
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