Author Topic: Introduction to BitShares - Video  (Read 24655 times)

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Offline bytemaster

I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price.  What is that incentive? 

In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value.  Similarly in futures markets.  With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.

It sounds to me like you're saying there is no such mechanism for bitUSD.  Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should.  Without some type of redeemability, I don't see how anyone could believe this will actually work.


When the value of BitUSD falls below a dollar, SHORTS COVER.   When it goes above a dollar new shorts enter the market.   Margin calls force shorts to cover. 
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Offline ruletheworld

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I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price.  What is that incentive? 

In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value.  Similarly in futures markets.  With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.

It sounds to me like you're saying there is no such mechanism for bitUSD.  Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should.  Without some type of redeemability, I don't see how anyone could believe this will actually work.

Here's how it would work out in this situation: Traders will see that bitUSD is undervalued, and therefore will go long bitUSD, waiting for the price to increase. Once it does, they will exit that position and get back their bitshares, but at a profit (i.e. more bitshares than they started off with) because of the increase in price. Similar situation will occur on the short side.

The mechanism is a little more tricky than ETFs that you mention above. The reason traders will go long bitUSD in the above situation is because they think the consensus will bring back the price to its 'true' value. When everyone thinks the same, the price indeed will be the true value. If there are (as it probably would be in the initial day or two, for instance) say just 4 players in the market, the equilibrium price will be harder to maintain. With more players looking for such opportunities, the system will track the true prices of things it represents. Or at least that's the hope.
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Offline Winslow Strong

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I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price.  What is that incentive? 

In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value.  Similarly in futures markets.  With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.

It sounds to me like you're saying there is no such mechanism for bitUSD.  Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should.  Without some type of redeemability, I don't see how anyone could believe this will actually work.
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Offline Stan

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Couldn't have said it more succinctly myself.
Anything said on these forums does not constitute an intent to create a legal obligation or contract of any kind.   These are merely my opinions which I reserve the right to change at any time.

Offline ruletheworld

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I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?

The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.

Or perhaps Dan has a better explanation of all of this!
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Offline Winslow Strong

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I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.

Let's compare it to an ETF.  There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of.  Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees).  Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.   

But it doesn't seem that bitUSD are redeemable for paper USD.  So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?   
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Offline bytemaster

This is a youtube video I produced that describes BitShares. 

http://www.youtube.com/watch?v=5BV55IrZi7g
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.