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Offline starspirit

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There is an underlying assumption I see often that BTS market cap must always expand with bitUSD market cap, because demand for bitUSD forces up demand for BTS, the collateral. And further for the pool of all bitAssets. But is this logically true? I found this complex to think through, so would genuinely not be surprised if I were wrong. But my conclusion is that the statement is not necessarily true - one does not necessarily drive the other.

First we need to recognise that at least from a valuation perspective, there is no reason why BTS should by necessity demand a higher valuation as a direct consequence of bitUSD growth. If all BTS ever earned as income from providing the platform were some small transaction fee for bitUSD usage (which in theory could be close to zero), its fair valuation should relate to that income, not the market cap of bitUSD.

Now let's think about the market dynamic.

1) Imagine somebody demands a huge amount of bitUSD today, but that overall market expectations for BTS valuation are unchanged. This party goes to an exchange and buys bitUSD with their fiat USD, driving the price above 1 fiat USD.
2) Seeing this favourable price, some arbitragers buy bitUSD with their BTS, sell it at the exchange for the higher fiat USD price, buy back their original BTS with fiat USD, and pocket a profit. This leads to an equalisation of the bitUSD premium on the exchanges and on the BTS/bitUSD exchange, but has had no net effect on BTS demand.
3) Now seeing this favourable BTS/bitUSD price another set of arbitragers that are current holders of BTS are able to come in and create new supply in bitUSD through shorts. The arbitrage is to short bitUSD (making them longer BTS), and to sell BTS on the exchanges, which maintains their overall exposure to BTS. Again there has been no net effect on BTS demand. But importantly BTS has moved from the hands of the arbitragers into the collateral pool to support the larger supply of bitUSD.

The end result of this sequence is that there has been no change in the net demand for BTS, but that there has been a movement of BTS into the collateral pool.

If demand were ongoing, and BTS value were unchanged, this sequence could be repeated until all the BTS sat in the collateral pool. The only condition is that the market cap of BTS needs to remain more than 3x the market cap of bitUSD, otherwise its likely that forced covering of the shorts due to under-collateralisation would begin to unwind the supply and so release BTS collateral from the pool again (which incidentally, on its own still has no net effect on BTS demand).

The logical conclusion I draw, if this is correct (???),  is that the market cap of BTS bears no direct relation to the market cap of bitUSD, except that the market cap of bitUSD bumps against a ceiling as it approaches 1/3 the market cap of BTS. The only economic relationship that can drive growth for BTS is whether BTS derives greater value of transaction and other platform fees from the larger supply of bitUSD.

Can anybody see the flaw if there is one?

[Edit 12 Nov 2014: After having reviewed the discussion and thought some more on it, I now interpret the result like this. For the market cap of bitAssets to grow up to the ceiling, it does not require BTS market cap to rise at all. The growth can be facilitated completely by arbitragers without increasing their net demand for BTS, if the market is stubborn in the valuation it places upon BTS. However, the result still allows the potential for the market to increase its evaluation of BTS if bitAsset markets grow, which in all likelihood it will do if enough people follow the meme that "bitAsset growth justifies higher valuations of BTS". But this is not a given, and if BTS valuation were constrained by other issues, even strong demand for bitUSD could not be fulfilled beyond the ceiling.

As a minor technical point, I also now believe that in step 3 of the sequence above, these players are not strictly implementing a risk-free arbitrage (in actual fact, there is no risk-free arbitrage for shorts). Instead they are speculating that the premium of the bitUSD price over the peg will fall, which is not guaranteed if demand remains consistently strong. This does not alter the argument or conclusions above, it only affects their incentive to participate in meeting the demand.]



 
« Last Edit: November 11, 2014, 11:49:01 PM by starspirit »

Offline Riverhead

Did you factor in that BTS is collateral for ALL assets, not just bitUSD?

Offline starspirit

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Did you factor in that BTS is collateral for ALL assets, not just bitUSD?
The same logic would follow, the only difference would be that the sum of the market caps of all the bitAssets would bump up against a ceiling of 1/3 the market cap of BTS. But still BTS valuation would not necessarily grow as a direct result of growth in the market cap of bitAssets. It's growth would only relate to the platform fees.

Offline toast

Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

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Offline tonyk

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Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

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No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.

« Last Edit: October 29, 2014, 01:06:56 AM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline starspirit

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Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

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The ceiling exists because at that point all of the BTS is in the collateral pool. The only possible movement in the supply of bitAssets from there is that they are released. For example, this could be forced covering if the value of BTS fell compared to the amount of bitAssets being supported.

I agree bts market cap will be a lot higher for quite some time. But it will be return potential that drives it forward.

Offline starspirit

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Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Offline tonyk

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Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
« Last Edit: October 29, 2014, 01:22:15 AM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline gamey

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Yep.  Increasing bitUSD supply takes away supply of btsx.  That doesn't lead to price increase if there was no demand for BTSX to begin with.
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Offline tonyk

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Yep.  Increasing bitUSD supply takes away supply of btsx.  That doesn't lead to price increase if there was no demand for BTSX to begin with.

Yes if there is no demand for something to begin with the price tends to be close to 0. Reducing the supply to this something something does not help much.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline arhag

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I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.

Offline gamey

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Yep.  Increasing bitUSD supply takes away supply of btsx.  That doesn't lead to price increase if there was no demand for BTSX to begin with.

Yes if there is no demand for something to begin with the price tends to be close to 0. Reducing the supply to this something something does not help much.

When I said demand, I meant demand on a market.  I just think people can have BTSX sitting around, convert it into bitUSD and it has done nothing because the supply/demand on the BTSX market hasn't changed.  Now if the BTSX converting to bitUSD is bought off the market, we have a different result.

Although I am not considering how this impacts the bitUSD market when I buy bitUSD.  The supply goes down there too.

edit - Although I agree that in general buying bitUSD will increase the price of BTSX, it isn't necessarily the case.
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Offline starspirit

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Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.

Offline starspirit

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I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.
I think what you are saying is that as long as BitAssets are growing, this will be positive for the perception of growth in BTS. And I agree with that. But there is no direct economic linkage apart from the fees.

Offline arhag

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I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.
I think what you are saying is that as long as BitAssets are growing, this will be positive for the perception of growth in BTS. And I agree with that. But there is no direct economic linkage apart from the fees.

No, I am not just talking about the perception. I am saying if the BTS/USD market was symmetric and there was a lot of liquidity, people could convert between BTS and USD easily without changing the price (same with BitAssets and USD or other assets because of arbitrage opportunities). For the price of BTS to be driven up, we need more demand for buying BTS with USD to get into the BitShares system than selling BTS for USD to get back into the fiat system. If people are just moving into the system to make some profits off speculation or gambling, or move money around using the internet, but then are ultimately cashing out into fiat to pay for real world goods/services, I expect the market to be mostly symmetric and therefore expect little to no growth. But if people instead keep their savings in the BitShares system, if they pay for goods/services in BitCurrencies and the merchants then pay their employees in the earned BitCurrencies, the BTS sell demand in outside exchanges will be significantly reduced (limited to paying taxes and other goods/services that haven't yet adopted the new technology) because it will instead go into the BitAsset shorts/longs (or even just holding BTS as savings). This causes an asymmetry in the outside exchanges which causes the larger BTS buy demand to drive the price of BTS up relative to USD.

Edit: Notice that nothing in my explanation says that the BitAsset growth causes an increase in the value of BTS necessarily. People could in theory just keep all of their wealth in BTS. So I guess I am not actually arguing against your original statement in the OP. But having BitCurrencies is useful in keeping the wealth in the BitShares system rather than being pulled back out into the fiat system (thus leading to the asymmetry that drives BTS value up) because BitCurrencies have price stability and BTS does not. This is one of the big advantages BTS has over BTC in growing the value of the token since people do not have to sell BTS for USD to pay for goods/services priced in USD (of course assuming the merchant can pay their employees and supply chain in BitUSD).
« Last Edit: October 29, 2014, 02:07:36 AM by arhag »

 

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