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Offline mdj

Instant BitAsset profit opportunities?
« on: March 28, 2015, 03:04:52 PM »

People currently buying Silver way above feed price. Anybody could short above feed price and instantly gain from feed -> bid?
I'm really surprised by the lack of liquidity on these assets!


Offline pc

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Re: Instant BitAsset profit opportunities?
« Reply #1 on: March 28, 2015, 04:55:26 PM »
Same on EUR/BTS market, and even CNY/BTS.

The danger is that if the BTS price goes down again you'll have to take severe losses when covering.
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Offline Chronos

Re: Instant BitAsset profit opportunities?
« Reply #2 on: March 28, 2015, 06:26:44 PM »
The danger is that if the BTS price goes down again you'll have to take severe losses when covering.
What about the danger that, even if BTS stays the same, at expiration, there are still bids above the feed price, and no asks nearby? When covering, a shortage of liquidity makes it difficult to cover. If there's any bid above price feed, you can't cover your own short (correct?). So you could be forced to buy back at an absurdly high price, to cover the short.

Am I missing something?

Let me summarize: due to high demand for BitAsset, and insufficient order book supply, when a short needs to cover, it has to severely overpay (vs feed price) to obtain the asset.

Offline starspirit

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Re: Instant BitAsset profit opportunities?
« Reply #3 on: March 28, 2015, 09:04:48 PM »
If the bitAsset is more fairly priced on an external exchange, buy on that exchange, and sell it on the internal exchange. That's an instant profit.

If the bitAsset is also at a premium on the external exchange, you could go long and short, and hopefully match these without somebody stepping in the way of either order. Then you could sell the long on the other exchange and exchange it for exposure to the underlying asset. That way you are hedged in BTS, and have sold bitAsset at a premium. As Chronos raises, your profit is not guaranteed, and depends on the premium reverting back at some point, so you have to be willing and able to hold (avoiding margin calls etc) to get this profit.

If the bitAsset does not trade on another exchange, you would have to short the bitAsset and separately sell BTS and buy the underlying asset on other exchanges. Again you have to hold until prices revert.

There are risks and costs in all these strategies. If we can minimise these risks and costs, and simplify the management of these strategies, then I believe we go a long way to improving the pegs going forward and avoiding these types of situations. It would also help gateways to offer narrower spreads. I've been addressing that issue in some other threads.

Offline Chronos

Re: Instant BitAsset profit opportunities?
« Reply #4 on: March 28, 2015, 10:51:55 PM »
Here's a thought: shorts are not allowed to execute below the price feed. This prevents shorts from driving asset price into the ground. (Correct?)

Example: This mechanism, plus the 30-day expiration of shorts, keeps BitUSD from equalizing near $0.50.

However, what about longs driving the price to the moon? The 30-day expiry could allow longs to eventually capitalize on such manipulation. What stops BitUSD from equalizing near $2, for example? Would any market mechanism naturally pull the price lower?

Offline jcalfee1

Re: Instant BitAsset profit opportunities?
« Reply #5 on: March 28, 2015, 10:55:32 PM »
The danger is that if the BTS price goes down again you'll have to take severe losses when covering.
What about the danger that, even if BTS stays the same, at expiration, there are still bids above the feed price, and no asks nearby? When covering, a shortage of liquidity makes it difficult to cover. If there's any bid above price feed, you can't cover your own short (correct?). So you could be forced to buy back at an absurdly high price, to cover the short.

Am I missing something?

Let me summarize: due to high demand for BitAsset, and insufficient order book supply, when a short needs to cover, it has to severely overpay (vs feed price) to obtain the asset.

Only short what you can cover.
« Last Edit: March 28, 2015, 10:57:52 PM by jcalfee1 »

Offline starspirit

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Re: Instant BitAsset profit opportunities?
« Reply #6 on: March 28, 2015, 11:15:28 PM »
Here's a thought: shorts are not allowed to execute below the price feed. This prevents shorts from driving asset price into the ground. (Correct?)

Example: This mechanism, plus the 30-day expiration of shorts, keeps BitUSD from equalizing near $0.50.

However, what about longs driving the price to the moon? The 30-day expiry could allow longs to eventually capitalize on such manipulation. What stops BitUSD from equalizing near $2, for example? Would any market mechanism naturally pull the price lower?
Yes, there is this asymmetry in bitAssets. Discounts can be mostly arbitraged away, at least in theory (although practical difficulties exist), because of the requirement for shorts to buy every 30 days. But in theory even, premiums cannot be arbitraged away, because there is no mechanism for longs to ever be forced to close their side. Premiums do however create an incentive for holders to sell, for shorts to sell, and for market-makers to create more bitAsset to sell, for the prospect of generating a profit should premiums at some time revert, without there being any guarantee of such, and premiums can in theory persist as long as there is demand for a bitAsset.

This is the flip-side of having bitAssets that are fungible. I have recently argued however, that fungibility is really only a required property of assets that are intended to be used in exchange for goods and services - i.e. currencies. Where utility is limited to investment or trading speculation, I believe we should drop the fungibility requirement, and create expiring derivative exposures that are symmetric and will be more strongly pegged. This would be more in line with what traditional derivative and CFD exchanges offer.

 

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