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Offline bytemaster

BitUSD Trading Guide
« on: August 19, 2014, 03:18:53 PM »

https://docs.google.com/a/invictus-innovations.com/document/d/1fVyf5oVsLZCrjkptNi2I-GPldIp-QM3vmTKpyy_2ZVU/edit

Please provide comments, edits, and help us refine this before we post it as a blog post on bitshares.org

BitUSD Trading Guide

Many people have been speculating how the BitUSD price will move relative to USD and are looking for guidance on how to value, price, trade, and speculate relative to BTSX.    The purpose of this guide is to explain how the market peg should behave assuming rational market players looking to earn a profit.   

All markets are subject to manipulation in the event that someone has a large amount of capital and isn’t looking to make a profit with their trades.  The larger a market becomes the harder it is to manipulate.    Because BitUSD is backed by BTSX, an attack on BitUSD is also an attack on BTSX (and vice versa) so regardless of which side of the market the attacker targets they will end up losing money.  Attacks are outside the scope of this guide.

At the core BitUSD always trades at a price near market consensus on what the consensus will be in the future.  This is based on the fundamental fact that the only way to exit a BitUSD position is via a voluntary trade at future market prices.

BitUSD has been seeded with the consensus that the value of one BitUSD should be equal to the value of one US dollar.  Therefore, unless something happens to change this consensus the most profitable trade to make is to buy BitUSD when it is under 1 USD and sell BitUSD when it is over 1 USD.  If you trade against this then you are predicting others will do the same and as far as I know there is no rationale for any other price.

However, this basic advice only applies for one type of trader: those that provide BitUSD liquidity for a small fee.  There are other types of traders in the market and I would like to address how each of them will affect the BitUSD price.

BTSX Bulls
Those that re bullish on BTSX will want to short BitUSD on the assumption that they will be able to buy it back cheaper in the future.  For these individuals it may make sense to short BitUSD even if it is slightly below the value of one dollar because they expect the dollar to fall against BTSX and thus profit.   In this case, Bulls shorting below USD parity are creating a buying opportunity for those who want to get dollars cheaper.  This is the moral equivalent of shorts (bulls) paying longs (bears) a premium (or interest) so they can take out a short position.

BTSX Bears

These are the people that believe that BTSX is over valued relative to the dollar and expect the value of the dollar to rise.  Perhaps they think BTSX is in a bubble.  Bears will buy BitUSD above the market peg and pay interest to those shorting in order gain the price stability and insurance. 


Market Makers

These players don’t pretend to know which way the market is going to move long-term, instead they only see an imbalance in the short term difference between BitUSD and USD.  Market makers know that the BitUSD/USD price will fluctuate based upon changes in the net flow of capital moving from BitUSD to BTSX or from BTSX to BitUSD  that temporarily move the peg until more capital is attracted by the price imbalance (aka implied interest). 

The existence of ebb and flow of sentiment between the bulls and bears causes the peg to lean one way or the other in during the transition only to stabilize again. 

Those who are mathematically inclined can view the expected deviation in BitUSD to USD price to be correlated to the first derivative of the USD/BTSX price graph.  Assume the green line represents the long-term growth of BTSX vs USD, the RED LINE is the first derivative and fluctuates based upon the direction of the market.

(see image in google doc)

Market makers trade the Red Line while bulls and bears trade the Green Line.  Trading the Red Line is only making the assumption that eventually the green line will change directions and thus the profits are much more predictable.  It is the competition for these predictable profits that causes the peg to hold very tightly in all market conditions.    The larger the market grows and the more automated bots and liquidity providers enter the market the smaller the deviations in price will become because the “time horizon” on the market direction will shrink substantially. 




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 xeroc

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Re: BitUSD Trading Guide
« Reply #1 on: August 19, 2014, 03:28:01 PM »
hu .. didnt see that one coming .. gonna read through it thos evening
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Offline maqifrnswa

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Re: BitUSD Trading Guide
« Reply #2 on: August 19, 2014, 03:35:31 PM »
It's good, people with experience trading will be ok with it.

Another guide that could be helpful is "How BitSharesX trading is different than traditional trading" so people don't get blindsided by some feature and get turned off to the whole system:

1) Trades are not matched as one familiar with traditional trading would expect:
http://wiki.bitshares.org/index.php/BitShares_X#Order_Matching_Algorithm

2) Trading range is limited by price feeds and the average value of recent trades.

3) anything else
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Offline tonyk

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Re: BitUSD Trading Guide
« Reply #3 on: August 19, 2014, 03:43:57 PM »
It's good, people with experience trading will be ok with it.

Another guide that could be helpful is "How BitSharesX trading is different than traditional trading" so people don't get blindsided by some feature and get turned off to the whole system:

1) Trades are not matched as one familiar with traditional trading would expect:
http://wiki.bitshares.org/index.php/BitShares_X#Order_Matching_Algorithm

2) Trading range is limited by price feeds and the average value of recent trades.

3) anything else

4) Being long and short at the same time and how short positions are closed in such case (need to see the final version tho).
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

Re: BitUSD Trading Guide
« Reply #4 on: August 19, 2014, 03:53:17 PM »
Quote
4) Being long and short at the same time and how short positions are closed in such case (need to see the final version tho).

Short positions are not closed in this case.  If you are short and long then that is your call, but you must manually cover with your USD.
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 tonyk

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Re: BitUSD Trading Guide
« Reply #5 on: August 19, 2014, 03:54:44 PM »
Quote
4) Being long and short at the same time and how short positions are closed in such case (need to see the final version tho).

Short positions are not closed in this case.  If you are short and long then that is your call, but you must manually cover with your USD.

In the last test run one could not cover with his bitUSDs.

If he can please post the commands to do so.

https://bitsharestalk.org/index.php?topic=6918.msg92375#msg92375
« Last Edit: August 19, 2014, 04:00:49 PM by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline Empirical1

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Re: BitUSD Trading Guide
« Reply #6 on: August 19, 2014, 03:59:11 PM »

BitUSD has been seeded with the consensus that the value of one BitUSD should be equal to the value of one US dollar.  Therefore, unless something happens to change this consensus the most profitable trade to make is to buy BitUSD when it is under 1 USD and sell BitUSD when it is over 1 USD.  If you trade against this then you are predicting others will do the same and as far as I know there is no rationale for any other price.


Not that I'd change it in the guide.

I'm not hot with this stuff, but from my perspective a BitUSD may be worth less than a USD in the beginning to me, because of system risk, lack of utility and the cost+effort of converting via a centralised exchange to say real USD for example.

I think once the system has proved robust, it has more utility, it's other advantages,  as well as if traditional banking risk factors increase. A BitUSD may be worth more than a normal USD to me.

Is that irrational. Is that not how it works?

Offline Musewhale

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Re: BitUSD Trading Guide
« Reply #7 on: August 19, 2014, 04:05:47 PM »
hu .. didnt see that one coming .. gonna read through it thos evening

"BTSX Bears",  It is difficult to hide

I must admit, I'm in here, "hu" is my family name  :-X :-X :-X
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Offline bytemaster

Re: BitUSD Trading Guide
« Reply #8 on: August 19, 2014, 04:07:01 PM »
Quote
4) Being long and short at the same time and how short positions are closed in such case (need to see the final version tho).

Short positions are not closed in this case.  If you are short and long then that is your call, but you must manually cover with your USD.

In the last test run one could not cover with his bitUSDs.

If he can please post the commands to do so.

https://bitsharestalk.org/index.php?topic=6918.msg92375#msg92375

Our unit tests show covering working.  I think there was some misunderstanding.
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 bytemaster

Re: BitUSD Trading Guide
« Reply #9 on: August 19, 2014, 04:11:14 PM »
Quote
I think once the system has proved robust, it has more utility, it's other advantages,  as well as if traditional banking risk factors increase. A BitUSD may be worth more than a normal USD to me.

Is that irrational. Is that not how it works?

These factors are irrelevant to the consensus... Initially shorts will probably be paying interest (by having BitUSD available at a discount) to attract new people (like yourself) to hold BitUSD.   However, everyone who recognizes the opportunity to buy BitUSD cheap can get some free gains when it returns to mean.   Provided it returns to the mean faster than BTSX climbs in value.
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 Frodo

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Re: BitUSD Trading Guide
« Reply #10 on: August 19, 2014, 04:41:31 PM »
Quote
I think once the system has proved robust, it has more utility, it's other advantages,  as well as if traditional banking risk factors increase. A BitUSD may be worth more than a normal USD to me.

Is that irrational. Is that not how it works?

These factors are irrelevant to the consensus... Initially shorts will probably be paying interest (by having BitUSD available at a discount) to attract new people (like yourself) to hold BitUSD.   However, everyone who recognizes the opportunity to buy BitUSD cheap can get some free gains when it returns to mean.   Provided it returns to the mean faster than BTSX climbs in value.

I think that might be exactly the problem. With BTSX price being relatively volatile I can imagine that a lot of traders will think it will be more profitable to short BitUSD even if it is trading slightly lower than USD.
I hope I am wrong though.

 +5% for the guide, definitely helped me understand the system a bit better.

Offline Empirical1

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Re: BitUSD Trading Guide
« Reply #11 on: August 19, 2014, 04:46:38 PM »
Quote
I think once the system has proved robust, it has more utility, it's other advantages,  as well as if traditional banking risk factors increase. A BitUSD may be worth more than a normal USD to me.

Is that irrational. Is that not how it works?

These factors are irrelevant to the consensus... Initially shorts will probably be paying interest (by having BitUSD available at a discount) to attract new people (like yourself) to hold BitUSD.   However, everyone who recognizes the opportunity to buy BitUSD cheap can get some free gains when it returns to mean.   Provided it returns to the mean faster than BTSX climbs in value.

Thanks for the explanation, sure you're right. It still seems in my head that even though you can seed it with a consensus of 1-1, the actual consensus could form around what is a BitUSD worth relative to a $, that will find a mean but not necessarily 1-1. 

« Last Edit: August 19, 2014, 04:48:15 PM by Empirical1 »

Offline donkeypong

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Re: BitUSD Trading Guide
« Reply #12 on: August 19, 2014, 10:28:04 PM »
Quote
I think once the system has proved robust, it has more utility, it's other advantages,  as well as if traditional banking risk factors increase. A BitUSD may be worth more than a normal USD to me.

Is that irrational. Is that not how it works?

These factors are irrelevant to the consensus... Initially shorts will probably be paying interest (by having BitUSD available at a discount) to attract new people (like yourself) to hold BitUSD.   However, everyone who recognizes the opportunity to buy BitUSD cheap can get some free gains when it returns to mean.   Provided it returns to the mean faster than BTSX climbs in value.

Thanks for the explanation, sure you're right. It still seems in my head that even though you can seed it with a consensus of 1-1, the actual consensus could form around what is a BitUSD worth relative to a $, that will find a mean but not necessarily 1-1.

We will see. The whole thing depends upon robust participation. If we build it, will they come? Hopefully, the marketing is about to kick into high gear. I actually feel more confident now than ever before, given the participation and success thus far with BitShares X. Even with limited features (without the assets that soon will be added), it really is a fine product, and I think a lot of people are discovering that now. And yet, we are going to need more participation. Near the beginning, there should be some exciting volatility, but I expect that to stabilize as it grows. Let's hope, if interest does start to flag at any point, new asset classes (toys) can be added to keep the game rolling. I can see proxies for gold, platinum, silver, oil, and all the agricultural commodity classes as well as the currencies.

The other thing we are going to need is merchants and services who accept BitUSD. Or BTSX. Or BitGLD. Or one or all.

Offline Empirical1

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Re: BitUSD Trading Guide
« Reply #13 on: August 19, 2014, 10:44:12 PM »
Quote
I think once the system has proved robust, it has more utility, it's other advantages,  as well as if traditional banking risk factors increase. A BitUSD may be worth more than a normal USD to me.

Is that irrational. Is that not how it works?

These factors are irrelevant to the consensus... Initially shorts will probably be paying interest (by having BitUSD available at a discount) to attract new people (like yourself) to hold BitUSD.   However, everyone who recognizes the opportunity to buy BitUSD cheap can get some free gains when it returns to mean.   Provided it returns to the mean faster than BTSX climbs in value.

Thanks for the explanation, sure you're right. It still seems in my head that even though you can seed it with a consensus of 1-1, the actual consensus could form around what is a BitUSD worth relative to a $, that will find a mean but not necessarily 1-1.

We will see. The whole thing depends upon robust participation. If we build it, will they come? Hopefully, the marketing is about to kick into high gear. I actually feel more confident now than ever before, given the participation and success thus far with BitShares X. Even with limited features (without the assets that soon will be added), it really is a fine product, and I think a lot of people are discovering that now. And yet, we are going to need more participation. Near the beginning, there should be some exciting volatility, but I expect that to stabilize as it grows. Let's hope, if interest does start to flag at any point, new asset classes (toys) can be added to keep the game rolling. I can see proxies for gold, platinum, silver, oil, and all the agricultural commodity classes as well as the currencies.

The other thing we are going to need is merchants and services who accept BitUSD. Or BTSX. Or BitGLD. Or one or all.

I think it will be amazing! History in the making!

Even if what I think could happen, happens, it just means BitAssets will trade 1-2% below the peg in the beginning but as it grows and matures, the reverse could happen and I expect BitAssets could trade/have their long term mean 1-2% above the peg.

Offline donkeypong

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Re: BitUSD Trading Guide
« Reply #14 on: August 19, 2014, 10:50:20 PM »
I think it will be amazing also. We just cannot fall short with participation. I guess my link to your post was (or should have been) that I think BitUSD could trade a bit low initially, but this is less likely with greater participation and volume. No reason it needs to equal USD value all the time, though; I expect it may hang lower or higher at times.

Also, never forget that global FOREX markets are a real nightmare of hassle. And it is a nightmare for many foreigners to acquire hard currencies or move money. Given that this will be SO much easier to use, could we see a higher BitUSD value than we might expect? Might the real risk premium actually be with fiat dollars?

 

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