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Offline dipplum

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This is a noob question. But I couldn't be sure if I understand it right.

For example, we have 4 million BTS in the first chain and suppose each BTS is worth $10 in the beginning. Let's assume that 50% of the BTS are converted into BitUSD at that time, then we would have 10 million BitUSDs in BitShare BEX.

If later the price of BTS dropped to $1 externally (not necessarily a sudden drop, it can be over months or even years), and BitUSD would rise also against BTS. Is it possible all those 10 million BitUSD would still exists in BEX?

My understanding is if no one covers their short positions, those 10 million BitUSD will be destroyed by forced margin call as soon as BTS drop more than 25% of its value against BitUSD (BTS that's backing the BitUSD will be returned), if some one covers their short positions, then at least some of the BitUSD will be destroyed and there will be less than 10 million BitUSD available. Therefore total amount of BitUSDs are limited by the exchange rate of BTS/USD? Is that right?

And even if anyone is able to predict that BTS price will drop from $10 to $1, there is no way he/she can act on it to preserve the dollar value within BitShare BEX system, e.g. converting BTS into BitUSD doesn't guarantee that you will own BitUSD for as long as you want, as the BitUSD will be converted back to BTS as soon as the BTS backing BitUSD falls more than 25% against BitUSD.

Am I missing anything or the BitShare BEX cannot protect the value of BitAsserts against a 25% price drop of BTS?
« Last Edit: January 11, 2014, 10:28:19 AM by dipplum »

Offline valtr

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #1 on: January 11, 2014, 11:45:42 AM »
If BTS drops to 1 USD externally, BitUSD value in BTS will drop too.  BitUSD is value of USD in BTS + - some % of trading spread.
Shorts will be happy,  because sold BitUSD for 10 BTS and can buyback for 1BTS. No need for covering.
Longs have the same amount of BitUSD + some dividends, but 10x times less BTS.

I hope somebody will review and confirm or deny my opinion.

Offline Markus

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #2 on: January 11, 2014, 11:57:51 AM »
This seems to be a tricky question. Let's see if I understood the whole thing and look at it from the inside:

1) 4 million BEX exist.
10 million BitUSD exist, each (on average) with a collateral of 0.2 BEX. The internal market prices them at 0.1 BEX. 2 million BEX are bound in collateral for BitUSD.

2) The external value of BEX drops from $10 to $6.67.
The internal price of BitUSD rises to 0.15 BEX.

3)This causes the first margin calls. (If all BitUSD had been created at the same price, all with exactly 0.2 BEX collateral this would cause an instantaneous short squeeze. But let's assume they were not.)
The first margin calls destroy some BitUSD and drive the price up to 0.16 BEX (with the external value of BEX unchanged at $6.67 one BitUSD is now $1.07).

4) $1.07 per BitUSD triggers shorts to create new BitUSD at 0.16 BEX, these now have a collateral of 0.32 BEX.

5) This goes on for a while: The exteral price of BEX continues to drop, more margin calls kill old BitUSD with small collateral, more shorts create new BitUSD with large collateral. Finally 3,999,999 BEX are bound in collateral but still 10 million BitUSD exist. The exteral value of BEX is near $5.

Really?

6) The last, only available BEX is highly sought after because it is the only way to short BitUSD. Its price should not be able to fall below $5. Demand should stop its external price from falling this low in the first place.

The external price of BEX can only fall more if more free BEX is available. The only way this would happen if BitUSD were voluntarily sold internally.

--> If all longs hold onto their BitUSD this should maintain their value.

Not the total amount of BitUSD is limited by the exchange rate of BTS/USD but the exchange rate of BTS/USD is limited by the total amount of BitUSD. :)
« Last Edit: January 11, 2014, 12:36:21 PM by Markus »

Offline Markus

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #3 on: January 11, 2014, 12:27:12 PM »
If BTS drops to 1 USD externally, BitUSD value in BTS will drop too.  BitUSD is value of USD in BTS + - some % of trading spread.
Shorts will be happy,  because sold BitUSD for 10 BTS and can buyback for 1BTS. No need for covering.
Longs have the same amount of BitUSD + some dividends, but 10x times less BTS.

I hope somebody will review and confirm or deny my opinion.

Reviewed it and going to deny it, sorry.
You are thinking the wrong direction: If BTS drops to 1 USD externally, BitUSD value in BTS will rise tenfold.

Offline HackFisher

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #4 on: January 11, 2014, 12:49:43 PM »
BitUSD price seems have no relation with USD price, except the risk of force margin call. Why will BitUSD value in BTS rise tenfold.
And the margin call will use forign price seed or not? how do that work?

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Offline Markus

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #5 on: January 11, 2014, 12:56:09 PM »
BitUSD price seems have no relation with USD price, except the risk of force margin call. Why will BitUSD value in BTS rise tenfold.
And the margin call will use forign price seed or not? how do that work?

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Well that's what this whole thing is about. Maybe take a day off, read (and try to understand) the BitShares white paper. :)


Offline HackFisher

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #6 on: January 11, 2014, 03:13:09 PM »
BitUSD price seems have no relation with USD price, except the risk of force margin call. Why will BitUSD value in BTS rise tenfold.
And the margin call will use forign price seed or not? how do that work?

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Well that's what this whole thing is about. Maybe take a day off, read (and try to understand) the BitShares white paper. :)

I actually tried to read part of the Bitshare white paper, e.g.
Quote
All market participants have something to gain if a common understanding can be reached that
BitGold is an derivative of  a 1oz gold  coin bond at the current dividend rate.  However, initially
there will be no ‘trust’ in what BitGold actually means.  As a result market participants will start
out  placing  orders  with  a  wide  spread.  As  the  market  depth  increases  the spread  will  also
decrease until a price is reached that has market consensus and is near parity with a 1oz gold
bond paying the current dividend rate.

It said that market consensus will be reached and is near parity with 1oz gold bond? How does that conclusion come out?
consensus seems be subjective and have no theory support or math basis.

We often say: "If it looks like a duck, sound like a duck, and acts like a duck, then it's a duck?". But the reverse doesn't make sense.

Just because we call it BitDuck, then it will looks like duck, sound like duck and price like duck? Did I miss something?

Can someone explain the key point to me?
« Last Edit: January 11, 2014, 03:20:43 PM by HackFisher »
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.

Offline valtr

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #7 on: January 11, 2014, 04:56:03 PM »
If BTS drops to 1 USD externally, BitUSD value in BTS will drop too.  BitUSD is value of USD in BTS + - some % of trading spread.
Shorts will be happy,  because sold BitUSD for 10 BTS and can buyback for 1BTS. No need for covering.
Longs have the same amount of BitUSD + some dividends, but 10x times less BTS.

I hope somebody will review and confirm or deny my opinion.

Reviewed it and going to deny it, sorry.
You are thinking the wrong direction: If BTS drops to 1 USD externally, BitUSD value in BTS will rise tenfold.
I missed that shorting BitUSD is reverse to shorting real USD. Am I right this time?

Offline valtr

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #8 on: January 11, 2014, 05:12:29 PM »
This seems to be a tricky question. Let's see if I understood the whole thing and look at it from the inside:

1) 4 million BEX exist.
10 million BitUSD exist, each (on average) with a collateral of 0.2 BEX. The internal market prices them at 0.1 BEX. 2 million BEX are bound in collateral for BitUSD.

2) The external value of BEX drops from $10 to $6.67.
The internal price of BitUSD rises to 0.15 BEX.

3)This causes the first margin calls. (If all BitUSD had been created at the same price, all with exactly 0.2 BEX collateral this would cause an instantaneous short squeeze. But let's assume they were not.)
The first margin calls destroy some BitUSD and drive the price up to 0.16 BEX (with the external value of BEX unchanged at $6.67 one BitUSD is now $1.07).

4) $1.07 per BitUSD triggers shorts to create new BitUSD at 0.16 BEX, these now have a collateral of 0.32 BEX.

5) This goes on for a while: The exteral price of BEX continues to drop, more margin calls kill old BitUSD with small collateral, more shorts create new BitUSD with large collateral. Finally 3,999,999 BEX are bound in collateral but still 10 million BitUSD exist. The exteral value of BEX is near $5.

Really?

6) The last, only available BEX is highly sought after because it is the only way to short BitUSD. Its price should not be able to fall below $5. Demand should stop its external price from falling this low in the first place.

The external price of BEX can only fall more if more free BEX is available. The only way this would happen if BitUSD were voluntarily sold internally.

--> If all longs hold onto their BitUSD this should maintain their value.

Not the total amount of BitUSD is limited by the exchange rate of BTS/USD but the exchange rate of BTS/USD is limited by the total amount of BitUSD. :)
Thanks for perfect explanation. I have read the Bitshares white paper, but was not able to think as described. No free BEX means there is nothing to sell externally. You can lose  your BitUSD or any other Bitasset only in case of totall colapse(destruction) of Bitshares system. Anyway situation as described in point 6) would be very dangerous for trust in Bitshares system or not? What do you think?

Offline dipplum

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #9 on: January 11, 2014, 06:56:17 PM »
Thanks for the discussion, I think I know where I might be wrong:
1. a large amount bit BitUSD will only be created when a lot of people wants to short USD
2. if they are wrong and the value of USD instead rise against BEX (or BTS using the old term), the short will try to buy back the BitUSD early to cover their collateral, which wound effectively drive BitUSD price up
3. if all longs simply hold on to BitUSD, BitUSD price will not change because no trade is happening, which means they also agree that BEX is not undervalued at the current exchange rate of BEX/BitUSD. Otherwise some of them will sell BitUSD for BEX

If most people simply holds their BitAssets, they are also putting their believes in BEX which would also hold the BEX value regardless of external exchange rate. If that's the case the external exchange rate would probably start to rise and follow the BEX/BitUSD instead.

Offline bytemaster

Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #10 on: January 12, 2014, 07:31:26 AM »
Demand for BitAssets drives up the demand for BitShares such that the market cap of BitShares will always be more than 1.5x the value of all BitAssets on the network.

If the price tracks as I expect... demand will be HUGE.
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Offline Markus

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #11 on: January 12, 2014, 07:45:36 AM »
It said that market consensus will be reached and is near parity with 1oz gold bond? How does that conclusion come out?
consensus seems be subjective and have no theory support or math basis.

We often say: "If it looks like a duck, sound like a duck, and acts like a duck, then it's a duck?". But the reverse doesn't make sense.

Just because we call it BitDuck, then it will looks like duck, sound like duck and price like duck? Did I miss something?

Can someone explain the key point to me?

This is what is so new about BitShares BEX. It is supposed to be like a future contact with infinite maturity. There is no payout at the end of term because there is no end of term.
It is assumed that all market participants will acknowledge that a certain BitAsset's fair value is what its name implies. This could work because there is no central authority issuing otherwise worthless certificates in unlimited amounts (as for example any other kind of traded certificate) but instead longs and shorts always have to agree on a price to create it in the first place - or to destroy it.
It doesn't even look like a duck nor sound like a duck, yet it's price will be that of a duck.

Most people would think this will not work because nothing comparable exists - like most people think crypto-currencies are a rip-off and will disappear soon. I think BitShares BEX could work but it might not. I also think the posibility for it to work is high enough to risk the gamble.

I missed that shorting BitUSD is reverse to shorting real USD. Am I right this time?
No, not quite.
Shorting BitUSD and shorting real USD is similar. What is important is what currency you short it against (your native currency). If you short USD against CNY you sell USD for CNY in the hope the value of CNY will rise and/or the value of USD will fall.
In BitShares your native currency is BEX. If you short BitUSD you sell BitUSD and hope its value will fall against BEX (which is the same as hoping the value of BEX will rise against BitUSD). So, if instead the value of BEX falls against BitUSD (as in the first post's scenario) the shorts are in a bad position.

… Anyway situation as described in point 6) would be very dangerous for trust in Bitshares system or not? What do you think?
The situation 6) is exaggerated. In reality demand for free BEX would kick in much earlier than with just 1 free BEX left. So the external price of BEX is likely to be cushioned much higher than $5.
Yes, I think if a situation arose with really so few free BEX available this would be an indication of a big problem.

Thanks for the discussion, I think I know where I might be wrong:
1. a large amount bit BitUSD will only be created when a lot of people wants to short USD
2. if they are wrong and the value of USD instead rise against BEX (or BTS using the old term), the short will try to buy back the BitUSD early to cover their collateral, which wound effectively drive BitUSD price up
3. if all longs simply hold on to BitUSD, BitUSD price will not change because no trade is happening, which means they also agree that BEX is not undervalued at the current exchange rate of BEX/BitUSD. Otherwise some of them will sell BitUSD for BEX

If most people simply holds their BitAssets, they are also putting their believes in BEX which would also hold the BEX value regardless of external exchange rate. If that's the case the external exchange rate would probably start to rise and follow the BEX/BitUSD instead.
Yeah, I think that sums it up nicely.
« Last Edit: January 12, 2014, 10:43:29 AM by Markus »

Offline bytemaster

Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #12 on: January 13, 2014, 09:31:39 PM »
It is great to see people explaining BitUSD and grasping the concept!   

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.

Offline wasthatawolf

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Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #13 on: January 15, 2014, 02:34:41 PM »
This is what is so new about BitShares BEX. It is supposed to be like a future contact with infinite maturity. There is no payout at the end of term because there is no end of term.  It is assumed that all market participants will acknowledge that a certain BitAsset's fair value is what its name implies. This could work because there is no central authority issuing otherwise worthless certificates in unlimited amounts (as for example any other kind of traded certificate) but instead longs and shorts always have to agree on a price to create it in the first place - or to destroy it.  It doesn't even look like a duck nor sound like a duck, yet it's price will be that of a duck.

Great explanation!  I've been reading about Bitshares since early November and I think I've finally connected most of the dots in my head after reading this thread.  I've found that explaining Bitshares (and Bitcoin) is easiest when comparing it to something that people already understand.

Maybe we need an open analogy bounty.  All good analogies could then be used in any future marketing campaigns.  Not only could this lead to good marketing material but it would help encourage people on these boards to think about these concepts in new, creative ways.



Offline bytemaster

Re: Are total amount of BitUSDs limited by the exchange rate of BTS/USD?
« Reply #14 on: January 15, 2014, 05:14:15 PM »
This is what is so new about BitShares BEX. It is supposed to be like a future contact with infinite maturity. There is no payout at the end of term because there is no end of term.  It is assumed that all market participants will acknowledge that a certain BitAsset's fair value is what its name implies. This could work because there is no central authority issuing otherwise worthless certificates in unlimited amounts (as for example any other kind of traded certificate) but instead longs and shorts always have to agree on a price to create it in the first place - or to destroy it.  It doesn't even look like a duck nor sound like a duck, yet it's price will be that of a duck.

Great explanation!  I've been reading about Bitshares since early November and I think I've finally connected most of the dots in my head after reading this thread.  I've found that explaining Bitshares (and Bitcoin) is easiest when comparing it to something that people already understand.

Maybe we need an open analogy bounty.  All good analogies could then be used in any future marketing campaigns.  Not only could this lead to good marketing material but it would help encourage people on these boards to think about these concepts in new, creative ways.

Good idea, consider it done...
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.

 

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