Market Neutral: The Art of Earning Without Betting on Market Direction

Open a regular crypto portfolio, perhaps even just your own. Bitcoin, two or three large caps, a handful of altcoins, sometimes a staking pocket: ten lines and the reassuring feeling of having spread the risk. But this feeling is false. These lines rise and fall together, and they do so even more in unison when the market drops, precisely when diversification should help. In terms of management, their correlation tends towards 1 during stress phases, so behind the ten lines, there is ultimately only one single bet, that of rising prices, repeated ten times.

This bet has sometimes enriched those who held it, but it remains a bet, and not everyone can afford to take it: a corporate treasury that publishes quarterly accounts, a fund that answers to a board of directors, an individual who has already sold at the worst moment once too often... For them, there exists another family of strategies, practiced for decades on stocks by long/short funds and now transposed to crypto: market neutral. Here, the market direction is removed from the equation, leaving only a flow of returns whose origin owes nothing to price movements. Where does this flow come from, who pays it, what it yields once fees are deducted, and, most importantly, what it does not protect against: we take stock in this first part of a series dedicated to this mechanism and its limits.

This article is brought to you by DCY. To discover their approach, visit dcy.fund.

Key Points

• A neutral position combines a spot purchase and a short sale of the same notional on a perpetual contract, which cancels out the price effect on the outcome.

• The reference funding rate (0.01% every eight hours) equates to nearly 11% annualized, but it fluctuates with demand for leverage and can go negative during panics.

• The margin deposited brings this figure down to around 8.8% on the actual capital immobilized, even before accounting for fees paid on both legs.

• Liquidation of the short leg and reference prices calculated by the platform remain two dangers that neutrality does not cover.

The Delta: The Art of Not Having an Opinion

As mentioned, this directional bet is perfectly defensible, and it has indeed made a lot of money for those who held it. However, one must know that one holds it, because it dictates the portfolio's yield, its volatility, and ultimately, the precise moment when one ends up selling at the worst place.

A manager, however, poses another question: what sources of yield to exploit without having to decide on the market direction? This is where market neutral comes from: a strategy bears this name when its net exposure to the direction of the underlying is zero, or at least maintained very close to zero, which the vocabulary of trading rooms summarizes in one word: delta. A delta of 1 means that a 1% movement in Bitcoin moves the position by 1%, while a delta of 0 means it does not move, regardless of the market direction. However, this delta never stays at zero on its own, as sizes drift, margins readjust, and gains accumulate on one side; thus, the essence of the job is to bring it back, rebalancing after rebalancing.

Let's take a simple case of cash-and-carry: we buy 1 BTC in cash and simultaneously sell the equivalent of one bitcoin on a perpetual contract, so that the long and short legs have exactly the same notional value. If bitcoin drops from $80,000 to $60,000, the spot leg loses $20,000 while the short leg gains the same amount; if it rises from $80,000 to $100,000, the opposite occurs, to the dollar (to be more precise, after fees). In both cases, the price-related result is therefore zero, and the capital is immobilized without earning anything on the price itself. The whole interest of the operation then lies in the flow that remains.

The Money Comes from the Impatient

A perpetual contract has, by definition, no expiration date. Nothing therefore forces its price to converge towards that of the spot market, as a future would do as it approaches delivery, and platforms correct this flaw through funding, a periodic payment between buyers and sellers whose sign depends on the difference between the perp price and a spot index. When the perpetual is priced above the spot, in other words when the premium is positive, the longs pay the shorts; the flow reverses in the opposite case.

The order of magnitude can be verified in three clicks. The reference rate hovers around 0.01% per eight-hour period on most platforms, or three periods per day, 0.03% daily, and 10.95% of the notional over a year without reinvestment, or just under 11.6% if payments are compounded. There is nothing exotic in this calculation, except that the rates actually observed, public and consultable in the funding history of each platform, often deviate significantly from this default value, in either direction.

Two clarifications indeed create a considerable gap between this figure and the yield actually received.

The first relates to the stability of the rate, which has none. The funding fluctuates based on the demand for leverage: very much above its default value during euphoric phases, when open interest swells on the buyer's side, it turns negative during panics. Ethena has built a whole synthetic stablecoin on this flow, and its yield, distributed to holders of USDe placed in staking, exceeded 20% annualized in spring 2024 before falling below 5% once the funding tightened. Thus, a yield announced at 11%, which assumes twelve months of constant payments, is merely a disguised extrapolation.

The second clarification concerns the calculation base, which is even more often overlooked. The yield is indeed measured on the capital engaged and not on the notional. However, holding the position described above requires not only buying 1 BTC in cash but also depositing an initial margin for the short leg and maintaining it above the maintenance threshold regardless of market movement. If this margin weighs a quarter of the position, the mobilized capital reaches 1.25 times the notional, and the effective yield mechanically drops from 10.95% to 8.8%. Add to this the execution fees, paid twice since there are two legs, and even more at each rebalancing, and one understands that a manager who talks about yield without specifying their calculation base is actually talking about something else.

It remains to be seen who is providing this flow, and why. The demand for leverage in crypto is predominantly bullish: an individual looking to amplify a conviction almost always does so to the upside, and they pay for it, period after period. On the other side, market makers and hedge funds have no desire to bet against Bitcoin; they therefore buy spot what they sell on the contract and receive, in return, the compensation for this liquidity service. The flow thus lasts as long as the asymmetry that fuels it: it shrinks when it shrinks and reverses when it reverses.

Neutral Does Not Mean Calm

Market neutral does not mean risk-free, and this is the most common misconception on the subject. A specific risk has indeed been removed, that of market direction, but all others remain in place, and they have names.

The first is basis risk: the price of the contract and that of the spot can diverge more than expected, which degrades the mark-to-market value of the whole without any directional movement being involved.

The second relates to the funding itself, which can become a cost, and which has indeed been for several days in a row after each major leverage purge.

The third is the liquidation risk of the short leg during a violent movement. On October 10, 2025, nearly $19 billion in positions disappeared in twenty-four hours, and the automatic deleveraging mechanisms (ADL, for auto-deleveraging) forcibly closed winning positions. In this scenario, the spot leg is left alone, perfectly directional, at the worst possible moment.

The fourth, finally, is the counterparty and custody risk. The whole relies on platforms that hold the assets and calculate their reference prices themselves. On that same October 10, USDe fell to $0.65 on Binance while the token was trading around $1 elsewhere, triggering a cascade of liquidations on positions that were supposed to be neutral; the platform then compensated the affected accounts. Three years earlier, funds that held their short leg at FTX in November 2022 lost both legs at once.

So, four risks, none of which are theoretical and each deserving better than the line just given to them.

What If We Simply Kept Our Bitcoin?

The most serious objection concerns opportunity cost. Over the long term, an investor who bought Bitcoin and did not touch it has outperformed, by a wide margin, any properly executed market neutral strategy. This point is not debatable, and no serious manager disputes it. However, the comparison rests on three assumptions that need to be clarified.

First, it assumes that one held from start to finish, without selling during the drawdowns of over 70% that Bitcoin has already experienced (84% between December 2017 and December 2018, 77% between November 2021 and November 2022).

Second, it assumes an investor who has all the time in the world and no liabilities to honor.

Finally, and most importantly, it assumes that they would have chosen Bitcoin rather than one of the thousands of assets that have disappeared along the way.

None of these hypotheses is absurd, but together they describe a rather rare investor in real life and, above all, a risk profile that a corporate treasury or an endowment fund simply cannot assume in front of its board of directors.

However, a note of honesty is required in the other direction. The actual average performance of crypto market neutral funds over the long term remains beyond the scope of this article, due to the lack of a public and homogeneous series, and the available databases also suffer from a massive survival bias, since a fund that closes stops reporting its figures. No one, on this side either, can therefore produce an indisputable figure.

Moreover, market neutral has never claimed to beat Bitcoin in a bull market. For a treasury that publishes quarterly accounts, the arbitration is rather between an annual flow of 8 to 9%, sometimes negative, and an asset capable of losing three-quarters of its value in twelve months.

This article was brought to you by DCY. Discover their approach to market neutral and their funds at dcy.fund.