> For the complete documentation index, see [llms.txt](https://docs.btcd.fi/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.btcd.fi/feature-overviews/protocol-design/reblancing.md).

# Reblancing

Revenue generation for changes in BTC price

### BTC Price Decreases

When BTC falls in value after BTCD minting, the hedged perpetual positions show unrealized profits while the spot BTC collateral loses USD value. Because we short an equal-notional futures position against the 0.5 BTC leg, those profits—and the offsetting spot P\&L—are realized in both BTC and USD settlement currencies depending on whether an inverse (BTC-margined) or linear (USD-margined) contract is used. Importantly:

* Unrealized Profits Accumulate: As the BTC price drops, the futures short gains value. These gains sit in the portfolio until the next rebalance; they are not sold back into BTC collateral.
* Minimal Yield Drag: Holding the profits as a small BTC or USD buffer does not materially reduce overall yield or introduce fresh risk.
* Contract Type Effects:
  * Linear-margined futures accrue profits in USDC/USDT, growing the USD sleeve.
  * Inverse (coin-margined) futures accrue profits in BTC, increasing the BTC sleeve.

In both cases, the protocol’s nightly or daily rebalance will automatically realize and reallocate these unrealized profits, restoring the precise 50 % BTC / 50 % USD split and resetting the hedge.

### BTC Price Increases

In a rising-BTC environment, the spot BTC collateral appreciates while the futures short shows unrealized losses:

* Spot Gains Offset by Futures Losses: The higher BTC price inflates the value of the 0.5 BTC backing but creates a corresponding notional loss on the short. In normal markets, these P\&L shifts net to zero in USD terms.
* Settlement-Currency Requirements:
  * USD-margined (linear) shorts require USDC/USDT to cover losses. The protocol either holds a small stablecoin buffer or temporarily “borrows” USDC at market interest until rebalanced.
  * BTC-margined (inverse) shorts self-settle in BTC, where increased spot BTC can cover the loss leg without touching the USD sleeve.

During the next automated rebalance window, unrealized losses are realized and the protocol trades back toward the target 50 % / 50 % allocation, ensuring collateral ratios and net delta remain correctly aligned.

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