Delta-neutral crypto strategies

Delta is a risk metric which measures the sensitivity of the derivative value with respect to changes in the price of the underlying asset. Delta-neutral means that a position has zero delta, which is another way of saying that the position (or portfolio) is not sensitive to the change in the underlying asset’s price. Though not totally fail-proof, it is a great way of minimizing market risk by decreasing the exposure of the portfolio to the market.

Given crypto is a highly volatile market, delta-neutral strategies should be a part of one’s portfolio. In the market where many assets can lose 90% of their value in days, you have to limit your exposure to the price risk by allocating part of your portfolio to delta-neutral strategies. We can specify several such strategies below.

Yield farming with stablecoins. There is a risk of impermanent loss in regular yield farming since price(s) of either token can change. Stablecoin farming minimizes this risk. You receive interest for providing liquidity to a pool while your risk is capped because you hold stable assets which have almost no exposure to market fluctuations. But stablecoins are not without risks about which we write below.

Leveraged yield farming (LYF) with stablecoin. LYF is what its name suggests. It’s the yield farming that uses leverage. LYF allows you to borrow and farm those tokens too to increase your return. Say, you put 1,000 USDC into a yield farming protocol. If you want to do yield farming with only your 1,000 USDC, this means 1X leverage. If you borrow 1,000 USDC and put that amount to work, it means you use 2X leverage. Borrowing twice the amount that you put originally is 3X leverage and so on.

LYF is capital-efficient which means that you can borrow more than you put up. This can strengthen your yield farming positions. As of this writing, 1X (that’s standard yield farming) yield farming on BUSD/USDT on Kalmar, a protocol built on Binance Smart Chain gives only 18.76% APY.

But if you choose the maximum possible 6.5X leverage, you’ll get 82.35% APY!

Leveraged stablecoin farming yields seem delicious, especially during crypto winter. It is certainly a good way to minimize your exposure to market swings. But don’t forget that stablecoins, too, can and do deviate from their pegs. In 2022 May we saw the spectacular failure of the Terra blockchain network which sent the price of its stablecoin UST to 0. Well, almost zero. Speaking of more recent events, USDC depeg after SVB default can be mentioned.