Author Topic: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?  (Read 10989 times)

0 Members and 1 Guest are viewing this topic.

Offline tonyk

  • Hero Member
  • *****
  • Posts: 3308
    • View Profile
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.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Seriously try to pick a lane... somewhere... if they cover(without more or equal new bitUSD created) this means that there is more supply than demand for bitUSD at that moment... so in this scenario the price of BTSX will likely go down....  but you original question is if the BTSX price will go up if the demand for bitUSD goes up....

Let me clarify where my understanding has got to.

1) It does not matter whether there in an increase in bitUSD demand from fiat, or a decrease in bitUSD demand toward fiat. Neither will translate into price pressure on BTS in the absence of a change in market opinion on BTS.

I postulated the former in my original argument, and the latter is simply the opposite set of actions. Essentially arbitragers never need to change their position on BTS (in fact should not, if they want the arbitrage to be risk-free) to facilitate an increase or decreased in bitUSD demand against fiat USD.

The important thing to additionally note is that:

2) If there is an increase in bitUSD demand from BTS in the bitshares market, this does translate into downward price pressure on BTS against fiat USD. And a decrease in demand for bitUSD toward BTS does translate into upward price pressure on BTS against fiat USD.

I postulated the former of these in another thread here, which remains uncountered...https://bitsharestalk.org/index.php?topic=10456.msg137622#msg137622. It is a little contrary to BMs stated view in the same thread.

These dynamics are not inconsistent at all. In fact they make sense to me when I think about what the source of demand is in each case.

Your counter to my original argument in this thread (that increasing demand from fiat USD does not increase price pressure on BTS in the absence of a change in market opinion on BTS) was that with more BTS locked up as collateral, supply is reduced, and this should cause price to rise. I eventually realised there is no BTS locked up for any definite period at all, because shorts at the margin can unwind at any point immediately to release collateral if the BTS price in fiat rises. In the absence of a change in market opinion on BTS, this negates the initial impetus to rise.

Originally I approached your counter from a different angle, that is now irrelevant I think. I hope you understand that the purpose of this thread was to illuminate through discussion, and not be too impatient for perfect clarity of one's argument.
In re of bolded - No they can not just close the position to release collateral. Each individually of them can, but with unchanged demand for bitUSD it means that they will have to buy bitUSD to close the positions from other shorts (as in new) opening exactly the same position.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit

It still seems incredibly counter-intuitive to me that money flowing into the system shouldn't increase the value of BTS. The argument that the increase in supply of BitUSD absorbs this pressure without raising the USD value of BTS doesn't resonate with me. I have to think about it more.

Perhaps the argument may just be that there is a lot of short demand that already exists but cannot be matched because of the price feed. After step 2, the buy pressure of BTS on the BTS/USD exchange causes the value of BTS to rise relative to USD. However, the buy pressure of BitUSD on the BTS/BitUSD exchange does not cause the value of BTS to fall relative to BitUSD by much, if at all, because of all the shorts just waiting to be matched. Then if you follow my arguments of step 3 with this in mind, you should see why their should be no net effect in either the BTS/USD or BTS/BitUSD exchanges either. The combined net effect of steps 2 and 3 is that the value of BTS rises relative to USD but only to the extent that there are enough BTS willing to be used to short BitUSD but are currently unable to do so because of the price feed restriction. I don't know, just a late night hypothesis that may be wrong.
There may be something true in this. There probably is some latent demand for BTS among short orders that exists only because of the ability to leverage, and would not otherwise be satisfied by these people buying BTS outright elsewhere. So even in the absence of a change of view on BTS, these fills will not be fully hedged out, facilitating some rise of BTS price in fiat. My initial thought is that the extent of this price rise is ultimately limited by the marginal BTS selling that eventually kicks in to match this new demand, again given the assumption that the market has not changed its outlook on BTS. How significant that is I would have to think about more, but I agree there is at least an effect here.

Offline ticklebiscuit

  • Full Member
  • ***
  • Posts: 97
    • View Profile
Making more bitdollar is like temporary burns of btsx.  Do delegatea burns increase value of the btsx left?

That will make your answer...

Offline arhag

  • Hero Member
  • *****
  • Posts: 1214
    • View Profile
    • My posts on Steem
  • BitShares: arhag
  • GitHub: arhag
You are right in that there is a difference in net demand in the two markets. There is a decline in demand for BTS in the decentralised exchange as bitUSD is bid up. And there is an increase in demand for the same quantity in the exchange market where BTS is bought to get back to the original exposure. The net effect of these is zero, though there is an opposite effect in each market.

I disagree that you can consider these two effects as canceling each other out...

That creates the arbitrage opportunity that is exploited in step (3) of my sequence, as shorts in the decentralised exchange increase (increasing BTS demand) and sales are made at the exchanges (reducing demand there). These net to zero also, but work to cancel the effects on the different exchanges.

If you go through my understanding of your step 3, you will see that indeed the buy pressure on BTS in the decentralized exchange cancels out the sell pressure from step 2, but I don't think the net effect on BTS in the BTS/USD exchange from step 3 is negative thus canceling out the positive effect on BTS in the BTS/USD exchange from step 2. The arbitrager in step 3 would first sell BTS for USD to maintain the same exposure (if they really cared about that), but once the peg on the decentralized exchange is back to normal they would sell the USD back to BTS. Thus in the same step (step 3) there is a net zero effect on the price of BTS relative to USD.

Edit: Darn. Actually sorry. During the covering step I would again create negative BTS pressure in the decentralized exchange as I tried to buy the necessary BitUSD to cover. So this only works if there are people willing to short the necessary amount at the new adjusted price to fulfill the BitUSD buy order without raising the price.

It still seems incredibly counter-intuitive to me that money flowing into the system shouldn't increase the value of BTS. The argument that the increase in supply of BitUSD absorbs this pressure without raising the USD value of BTS doesn't resonate with me. I have to think about it more.

Perhaps the argument may just be that there is a lot of short demand that already exists but cannot be matched because of the price feed. After step 2, the buy pressure of BTS on the BTS/USD exchange causes the value of BTS to rise relative to USD. However, the buy pressure of BitUSD on the BTS/BitUSD exchange does not cause the value of BTS to fall relative to BitUSD by much, if at all, because of all the shorts just waiting to be matched. Then if you follow my arguments of step 3 with this in mind, you should see why their should be no net effect in either the BTS/USD or BTS/BitUSD exchanges either. The combined net effect of steps 2 and 3 is that the value of BTS rises relative to USD but only to the extent that there are enough BTS willing to be used to short BitUSD but are currently unable to do so because of the price feed restriction. I don't know, just a late night hypothesis that may be wrong.
« Last Edit: October 29, 2014, 07:51:44 am by arhag »

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit

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.

I don't see why this doesn't have a net effect on BTS demand. If I buy BitUSD using BTS on the decentralized exchange, I drive the price of BitUSD relative to BTS up, but haven't yet affected the price of BTS relative to USD. I am also exposed to the dollar rather than to BTS like I want to be. So to correct that I first sell the BitUSD for USD at a premium due to the high demand for BitUSD at the outside exchanges and then use some of the USD to buy back my BTS position, and some USD is left over as profit from the arbitrage. The buy demand of BTS using USD on the exchange drives the price of BTS relative to USD up.

Now compare this to the case where the desperate BitUSD buyer was to take an alternative path to get more bang for their buck. They could have used their USD to buy BTS and then used the BTS to buy BitUSD on the decentralized exchange. Because of the higher liquidity on those exchanges, they could have gotten more BitUSD for their USD. The difference between the two cases would have been the extra profit that I would have not realized through arbitrage if the BitUSD buyer was smarter.


Thanks arhag.
You are right in that there is a difference in net demand in the two markets. There is a decline in demand for BTS in the decentralised exchange as bitUSD is bid up. And there is an increase in demand for the same quantity in the exchange market where BTS is bought to get back to the original exposure. The net effect of these is zero, though there is an opposite effect in each market. That creates the arbitrage opportunity that is exploited in step (3) of my sequence, as shorts in the decentralised exchange increase (increasing BTS demand) and sales are made at the exchanges (reducing demand there). These net to zero also, but work to cancel the effects on the different exchanges.

In your example of the desperate bitUSD buyer, in that case he is also increasing BTS demand on the exchanges, and then decreasing demand by the same quantity in the decentralised exchange when he buys his bitUSD there. These net to zero. The arbitrage opportunity opened up is then exploited in the same way in step 3 of the sequence, again with net zero change in demand overall, but cancelling the initial effects.

To be honest I did not read through your quantitative demonstration due to time constraints (sorry), but you look to have gotten to answer that I would have expected.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit
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.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Seriously try to pick a lane... somewhere... if they cover(without more or equal new bitUSD created) this means that there is more supply than demand for bitUSD at that moment... so in this scenario the price of BTSX will likely go down....  but you original question is if the BTSX price will go up if the demand for bitUSD goes up....

Let me clarify where my understanding has got to.

1) It does not matter whether there in an increase in bitUSD demand from fiat, or a decrease in bitUSD demand toward fiat. Neither will translate into price pressure on BTS in the absence of a change in market opinion on BTS.

I postulated the former in my original argument, and the latter is simply the opposite set of actions. Essentially arbitragers never need to change their position on BTS (in fact should not, if they want the arbitrage to be risk-free) to facilitate an increase or decreased in bitUSD demand against fiat USD.

The important thing to additionally note is that:

2) If there is an increase in bitUSD demand from BTS in the bitshares market, this does translate into downward price pressure on BTS against fiat USD. And a decrease in demand for bitUSD toward BTS does translate into upward price pressure on BTS against fiat USD.

I postulated the former of these in another thread here, which remains uncountered...https://bitsharestalk.org/index.php?topic=10456.msg137622#msg137622. It is a little contrary to BMs stated view in the same thread.

These dynamics are not inconsistent at all. In fact they make sense to me when I think about what the source of demand is in each case.

Your counter to my original argument in this thread (that increasing demand from fiat USD does not increase price pressure on BTS in the absence of a change in market opinion on BTS) was that with more BTS locked up as collateral, supply is reduced, and this should cause price to rise. I eventually realised there is no BTS locked up for any definite period at all, because shorts at the margin can unwind at any point immediately to release collateral if the BTS price in fiat rises. In the absence of a change in market opinion on BTS, this negates the initial impetus to rise.

Originally I approached your counter from a different angle, that is now irrelevant I think. I hope you understand that the purpose of this thread was to illuminate through discussion, and not be too impatient for perfect clarity of one's argument.

Offline arhag

  • Hero Member
  • *****
  • Posts: 1214
    • View Profile
    • My posts on Steem
  • BitShares: arhag
  • GitHub: arhag
Yes, they will short BitUSD (go longer BTS) but as a hedge they must also sell BTS on the exchange, otherwise their BTS exposure has changed and its not risk-free. (If they did not do this, even though they may make money on the premium to the feed price, they will be exposed the the movement of the feed price during their holding period). As a result there is no new net demand for BTS from the arbitrager.

I see what you are saying about the exposure. But I still think there is net demand when someone holding USD wants to buy BitUSD. Let me go through it all again more carefully so I don't make a mistake. But it's pretty late so I am sure I will make mistakes and I am counting on you to point them out.

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.

I don't see why this doesn't have a net effect on BTS demand. If I buy BitUSD using BTS on the decentralized exchange, I drive the price of BitUSD relative to BTS up, but haven't yet affected the price of BTS relative to USD. I am also exposed to the dollar rather than to BTS like I want to be. So to correct that I first sell the BitUSD for USD at a premium due to the high demand for BitUSD at the outside exchanges and then use some of the USD to buy back my BTS position, and some USD is left over as profit from the arbitrage. The buy demand of BTS using USD on the exchange drives the price of BTS relative to USD up.

Now compare this to the case where the desperate BitUSD buyer was to take an alternative path to get more bang for their buck. They could have used their USD to buy BTS and then used the BTS to buy BitUSD on the decentralized exchange. Because of the higher liquidity on those exchanges, they could have gotten more BitUSD for their USD. The difference between the two cases would have been the extra profit that I would have not realized through arbitrage if the BitUSD buyer was smarter.

In both cases, there should be USD purchasing BTS (but not the other way around) which drives the price of BTS relative to USD up.

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.

Yes, if they have to maintain their exact same exposure there is no net effect on BTS demand from this step. Let me go in more detail with an example.

Let's say I have 4000 BTS which is currently worth 100 USD. I am happy with this exposure. The decentralized exchange however is trading 42 BTS for 1 BitUSD, meaning BitUSD is at a premium compared to USD. This may be because someone pursuing an arbitrage opportunity described in the previous step bid the price of BitUSD up while trying to convert BTS into BitUSD. There is an arbitrage opportunity here that I want to take advantage of without changing my exposure. In other words, if the price of BTS (in USD) drops in half, I don't want the USD value of my holdings to drop by more than half. I use 3000 BTS to short 24 BitUSD, and use the other 1000 BTS to buy 25 USD (yes this is BTS sell pressure). My short at 0% interest is matched by someone who purchased 24 BitUSD using 1000 BTS. The amount of BTS I own that is locked in the collateral is 4000 BTS, but of course I owe the network 24 BitUSD (luckily I also own 25 USD). Therefore, my exposure is more or less what it was before (assuming the peg more or less holds in the medium term). When the peg returns back to normal (40 BTS for 1 BitUSD), I can sell 25 USD for about 1000 BTS (this is the BTS buy pressure that counteracts the earlier BTS sell pressure which results in no net effect on BTS value in terms of USD through this process) and use 960 BTS to buy the 24 BitUSD I need to cover my short and get back my 4000 BTS. The end result of this process is that I am back to where I started except I gained an extra 40 BTS (ignoring exchange fees and assuming high liquidity on the BTS/USD market).


So based on this analysis I would say the second step has no net effect on BTS/USD but the first step does increase the value of BTS relative to USD.
« Last Edit: October 29, 2014, 06:38:06 am by arhag »

Offline tonyk

  • Hero Member
  • *****
  • Posts: 3308
    • View Profile
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.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Seriously try to pick a lane... somewhere... if they cover(without more or equal new bitUSD created) this means that there is more supply than demand for bitUSD at that moment... so in this scenario the price of BTSX will likely go down....  but you original question is if the BTSX price will go up if the demand for bitUSD goes up....
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually.
Here you are assuming the arbitrager is happy to have a longer exposure on BTS (via short BitUSD) simply to take advantage of the arbitrage. But if their view on BTS is unchanged (my original assumption), they actually need to sell a corresponding amount of BTS for USD on the exchange to make their arbitrage risk-free. I think that changes the remainder of the argument you make? See if you are still happy with it...

I am not sure I understand, if BitUSD is trading at a premium the BTS holder wouldn't buy BitUSD using BTS at the existing premium prices to make money off arbitrage (as you state in the OP nevermind that was something else). They would short BitUSD so they can later buy BitUSD when it returns back to the peg and make profit that came from the person who was desperate enough to buy BitUSD using BTS during the premium price.

The arbitrager's view on BTS (in terms of USD) has not changed. What has changes is that the price of BTS (in terms of BitUSD) has dropped, or BitUSD is trading at a premium. So even if their valuation of BTS hasn't changed, they are still motivated to short BitUSD on the BitShares decentralized exchange to make profit in the short term.
Yes, they will short BitUSD (go longer BTS) but as a hedge they must also sell BTS on the exchange, otherwise their BTS exposure has changed and its not risk-free. (If they did not do this, even though they may make money on the premium to the feed price, they will be exposed the the movement of the feed price during their holding period). As a result there is no new net demand for BTS from the arbitrager.

Also you suggested that the increased demand for bitUSD, if not ultimately resulting in a rise in price of bitUSD (because this is arbitraged away), must go somewhere in the system and lead to a rise in price of BTS. But this is not required because the supply of bitUSD has increased to meet the demand, absorbing that pressure.

Offline arhag

  • Hero Member
  • *****
  • Posts: 1214
    • View Profile
    • My posts on Steem
  • BitShares: arhag
  • GitHub: arhag
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually.
Here you are assuming the arbitrager is happy to have a longer exposure on BTS (via short BitUSD) simply to take advantage of the arbitrage. But if their view on BTS is unchanged (my original assumption), they actually need to sell a corresponding amount of BTS for USD on the exchange to make their arbitrage risk-free. I think that changes the remainder of the argument you make? See if you are still happy with it...

I am not sure I understand, if BitUSD is trading at a premium the BTS holder wouldn't buy BitUSD using BTS at the existing premium prices to make money off arbitrage (as you state in the OP nevermind that was something else). They would short BitUSD so they can later buy BitUSD when it returns back to the peg and make profit that came from the person who was desperate enough to buy BitUSD using BTS during the premium price.

The arbitrager's view on BTS (in terms of USD) has not changed. What has changes is that the price of BTS (in terms of BitUSD) has dropped, or BitUSD is trading at a premium. So even if their valuation of BTS hasn't changed, they are still motivated to short BitUSD on the BitShares decentralized exchange to make profit in the short term.
« Last Edit: October 29, 2014, 03:55:52 am by arhag »

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit
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.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually.
Here you are assuming the arbitrager is happy to have a longer exposure on BTS (via short BitUSD) simply to take advantage of the arbitrage. But if their view on BTS is unchanged (my original assumption), they actually need to sell a corresponding amount of BTS for USD on the exchange to make their arbitrage risk-free. I think that changes the remainder of the argument you make? See if you are still happy with it...

Edit: Also note I wrote this before I saw your edit! So my comment only relates to the arbitrage discussion.
« Last Edit: October 29, 2014, 03:48:48 am by starspirit »

Offline arhag

  • Hero Member
  • *****
  • Posts: 1214
    • View Profile
    • My posts on Steem
  • BitShares: arhag
  • GitHub: arhag
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

There is a limited amount of BTS shares. If more people want to be in the BitShares system (whether by holding BTS or holding BitAssets which are backed by BTS) this will increase the demand on BTS. Obviously wanting to hold BTS by purchasing it with fiat increases the demand on BTS. But wanting to hold BitUSD by purchasing it with USD also increases the demand on BTS as well. If the BitUSD supply does not grow, the increased demand on BitUSD will cause its value to rise above the value of USD. BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually. An equilibrium should be reached where the profit motive of shorting BitUSD on BitShares is balanced with the profit motive of selling BTS for USD at a higher price on the exchanges because of all of the disappearing BTS sell pressure. Basically arbitrage means that it shouldn't matter too much whether you buy BTS with USD and then use the BTS to buy BitUSD or you purchase BitUSD with USD directly; since this demand into the BitShares system isn't going to raise the price of BitUSD over the long term (because of the peg) it must raise the price of BTS.

Edit: And the above is assuming that the inactive BTS (the hodlers not the traders) aren't changing their behavior. At the ceiling you describe, there are no inactive BTS holders that could change their mind because they are all locked up as collateral in shorts. In theory, the change in BitAsset market cap does not need to correlate with BTS market cap (assuming we are not at that ceiling) because of the change in behavior of some fraction of the BTS holders. For example, the BitUSD short demand in my previous example could be satisfied by BTS hodlers deciding to become traders and short BitUSD back to its peg. If enough people do this, then I can imagine that the BTS sell pressure at exchanges doesn't need to disappear and thus the price of BTS doesn't need to grow relative to USD. But if this process continues to happen, eventually the supply of BTS that are willing to transition from a hodler to a trader will be exhausted, and this has to mean that the price of BTS relative to USD has to rise. This needs to happen at the 3x ceiling you describe, but will very likely happen before then because not every BTS holder will be willing to short.

So I think what this all means is that I agree with your statement that we should not be "subsidizing BitAsset users from BTS funds" and I am also very skeptical of the claim of 3x benefits by funneling users into BitUSD through attractive yields rather than to just BTS. But I do believe that attracting outside wealth into the BitShares system in general (whether it is BTS or BitAssets) does directly grow the value of BTS. And obviously BitUSD (a price stable cryptocurrency) is critical to attracting wealth to BitShares in the first place, and having a yield rate close to 5% is a powerful marketing message since it is better than what people can get from traditional banks (although I think having it be any higher than that is a waste of resources because of diminishing returns in marketing).
« Last Edit: October 29, 2014, 03:40:51 am by arhag »

Offline starspirit

  • Hero Member
  • *****
  • Posts: 948
  • Financial markets pro over 20 years
    • View Profile
  • BitShares: starspirit
Even though you can buy small amounts of BitUSD from a large collateral pool without directly effecting the CAP with that specific purchase,  under the current system, the BTSX CAP still has to be at least 2X the total BitAssets in circulation because I can't buy 1 BitUSD without the market CAP being at least $2 after the transaction.
Yes, actually 3x, because the long puts up $1 of BTS collateral, and the short puts up 2.
But still bitAsset market cap growth does not force BTS market cap growth.
The limiting condition can work both ways. BitAsset growth can drive up to the ceiling because BTS doesn't grow as much, or BTS valuation can fall driving the ceiling down and supply back out of bitAssets.
I'm not trying to comment on what this all means yet, I'm still trying to work that out! But as a start I would be careful with any proposals around subsiding bitAsset users from BTS funds.

Offline tonyk

  • Hero Member
  • *****
  • Posts: 3308
    • View Profile
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.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.