2nd June 2024 > > Ethena ecosystem & BTC miners.

tl;dr

Another warning about the Ethena ecosystem. Mining stocks provide leveraged returns on the price of BTC but require constant portfolio management.

Market Snap

Market Wrap

Now that the concept of spot ETH ETFs has been approved, we are waiting on the SEC’s agreement to the working mechanism for each of the individual applications. Forms were submitted on Friday, and no doubt the SEC will want to see some changes. Will the ETFs get the go-ahead this week? That could be exciting.

Curious Cryptos’ Commentary – USDe stablecoin

I read that the issuance of USDe (USD Ethena) has grown to $3bn in just four months, the fastest growing stablecoin to date, a most worrying development. I feel compelled to set out my concerns once more, so that as a consenting adult, if you get involved with the Ethena ecosystem you know what you are getting into.

The reason for the rapid growth of USDe is that the issuer, Ethena Labs, is sharing some of its revenue gains with owners of USDe. The largest stablecoin USDT (Tether) rakes in billions of dollars every quarter for a company whose workforce numbers less than one hundred, but that income accrues only to the issuer and is paid out to the employees. That’s a nice quarterly bonus.

USDe is an algorithmic stablecoin. All algorithmic stablecoins have the same destiny – they are all fated to go to zero, causing huge pain for direct investors and the wider crypto ecosystem. The only unknown is the date of the collapse, though it will either be timed close to the depths of the next bear market or may even trigger the next bear market.

In the case of USDe, its value is supported not by real assets acting as collateral to the issuance of USDe, but by the generation of income using the cash and carry trade. In the cash and carry trade, assets are used as collateral against liabilities incurred by selling futures. Pledging those assets against futures means that the owners of USDe have no recourse to any collateral.

In theory, this trade works. In practice, it works for a while, and then it doesn’t. Markets periodically go through irrational stages, causing the maximum amount of pain for the maximum number of leveraged players. It was exactly this that caused the downfall of Long Term Capital Management, sparking a wider conflagration in the world’s capital markets. Make no mistake, USDe is a leveraged play. One day its solvency will be challenged by the market’s irrationality, and the whole Ethena ecosystem will be liquidated.

Not today, not tomorrow, not even this year (probably). But its fate is written in stone. Never forget this truth.

Curious Cryptos’ Commentary – Miner’s revenues

This could well be one source of the dampening of BTC’s price action in the face of sustained buying pressure from ETFs and Whales:

Riot’s recent acquisition of Bitfarms Ltd. is just the opening salvo in what will become an intense war to build mass and gain market share in the mining industry. Low electricity prices achieved either by use of renewable energy (El Salvador’s use of volcanoes is a great example) or in combination with securing the grid (as we have seen in Texas) is critical to mining success.

Mining stocks provide a leveraged play on the price of BTC, but without liquidation risk. However, managing your portfolio of mining stocks to ensure you own the acquirers and not the acquired probably warrants greater attention than managing your portfolio of cryptos.