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