Oh, I think I get your concern. I'll preface this by saying that I don't have a DSD capable DAC, or any related files, so I'm basing this on my understanding of how MC's other bitstreaming (previously, generally video playback related) options work.
The way HDMI Bitstreaming in MC works is this:
* If you play back a format supported for HDMI Bitstreaming (where the remote device can handle the files natively) then it bitstreams them. Bitstreaming means: MC does not decode the audio. Without decoding it (to PCM) MC cannot, in any way, alter it. It simply sends it, as-is, down the "wire" to the audio device, and it is "that device's" problem. So, for HDMI bitstreaming this would be: AC3, E-AC3, TrueHD, DTS, DTS-HD.
* If you play back a format that is NOT supported, then those files go through the normally configured audio chain and DSP. So, if I have bitstreaming enabled, and I play a video file that has (for example) embedded FLAC audio (or AAC or MP3), then MC uses its normal audio engine and sends PCM to the receiver.
I'd assume, but someone like mojave would have to come and confirm, that DSD bitstreaming works the same way.
There are two related, but not identical options for outputting DSD:
1. In the Output Format DSP you can set the output encoding to a particular DSD setting. This converts EVERYTHING that MC sends down the wire to DSD before it is sent down the wire. This impacts OUTPUT. It says nothing about what happens to the files before that step. The MC's Audio Engine operates on PCM, so to use anything else in the Audio Engine, it has to go through a PCM conversion step.
This is not bad. It does it well, and it provides you with a ton of features.
2. In Tools > Options > Audio > Settings you can enable Bitstreaming. Bitstreaming means, for these particular formats, bypass MC's audio engine entirely and send them untouched down the wire.
If you enable Bitstreaming, you will have to take other steps to match gain levels, and you probably can't use MC's DSP very much (because those settings will only apply to non-bitstreamed formats, causing variation). When you enable Bitstreaming, basically all audio processing needs to be done on the receiving end. You can still use JRSS and stuff if you need to apply those changes only to non-bitstreamed formats, but things like Room Correction won't work well (because they won't apply to bitstreamed content).
