Delta-Neutral Stability

What does "delta" mean?

"Delta" denotes the rate at which the price of a derivative reacts to fluctuations in the price of its underlying asset.

Understanding Delta-Neutral Stability

A delta-neutral position (or portfolio) is one where the exposure to price movements of an underlying asset is effectively zero, because any gain from a price increase is offset by an equivalent loss from a price decrease—and vice versa.

For example, suppose a stablecoin is backed by BTC. Its value will normally rise or fall alongside the price of BTC. However, if we hedge this by shorting the same amount of BTC/USDT perpetual contracts, gains or losses in the BTC backing are balanced by opposite gains or losses in the short position. As a result, the stablecoin’s overall value remains stable regardless of BTC price movements.

Building on the earlier example, when a user buys USDX with stablecoins (like USDC or USDT), usdx.money automatically creates a delta-neutral position. This is achieved by taking a corresponding long position in BTC spot while simultaneously short-selling a BTC/USDT perpetual contract in the same amount. As a result, any gains or losses in the spot position are offset by the opposite gains or losses in the short position, ensuring that usdx.money’s overall exposure (or delta) remains effectively zero.

In simpler terms, being delta-neutral ensures the portfolio's USD value is impervious to market volatility (i.e., irrespective of any underlying cryptocurrency spot price movements). Even if the prices were to soar and then plummet dramatically within seconds, the portfolio's USD valuation would stay stable, save for brief discrepancies between spot prices and derivative markets.

This strategy is not limited to BTC; usdx.money applies the same approach to a variety of cryptocurrencies, capturing delta-neutral returns across multiple assets. usdx.money conducts trades across various exchanges without utilizing leverage, maintaining delta neutrality by ensuring that short positions in perpetual contracts match the size of the underlying assets.

It's worth mentioning that maintaining a delta-neutral position is a common strategy among institutional market makers to circumvent the risks associated with price volatility, a practice well-entrenched in both the realms of traditional finance and cryptocurrency markets.

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