Author Topic: Aren't BitAssets sort of like naked short selling?  (Read 4474 times)

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Offline luckybit

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This is interesting.  As far as I can see bitUSD is competing with the USD just as much as DOGE or EUROs.  All these competing currencies lessen demand for each other.  People who were holding USD sold it to buy bitUSD, or BTC or CNY or any other currency. 

Therefore bitUSD is inflating the USD by lessening demand for it, the same as any currency.  When a country stops accepting USD for oil that lessens demand for it in that country causing USD's to find their way back to the USA where they cause inflation.  Hence the petrodollar being forced on people at the point of a gun (one of the first things the US did after invading Iraq was switch their oil back to USD from EUROs).  That's why we don't here horrible things about Saudi Arabia (despotic regime) from the mainstream media, because they still price their oil in USD so we like them.  So yes I would say it is inflating it, but no more than any other currency. 

This is if we say that inflation is the weakening of a currency due to the demand vs unit ratio decreasing.

If you think about it, if half of the users of the USD suddenly died (lets hope not) and for some reason all the other users carried on using USD the supply would have effectively doubled without printing any more USD, resulting in inflation.  So inflation isn't just about money creation but is about demand vs number of units.

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Offline kisa

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velocity of money is the result of low demand to hold.... it does not create a low demand to hold.
agree with that -> velocity is symptomatic of low demand to hold - my original statement was inconclusive

inflation is a supply driven event.
hyperinflation is a demand driven event... ie demand to hold goes to 0.

High velocity is the result of hyperinflation loss of demand while the currency is still a unit of account and used in trade.   You must buy/sell with it so you get "in and out" as quickly as you can to avoid losses from holding.

You can have high velocity of trades with increasing demand in an economy that is very dynamic with low transaction cost overhead
-> is this our best hope for the role of bitUSD in the crypto economy?

Thanks date peg doe for your providing detailed reference, very informative!

Thanks BM!
Perhaps somewhat clearer what I mean is simply that the act of issuing bitUSD is not impacting on money supply/velocity one-way. That depends on how much BTSX is being used for payments as a currency itself (who knows it might become payments means), and on whether bitUSD is being issued for transaction or for investment purpose in that particular case...
« Last Edit: September 27, 2014, 10:36:32 pm by kisa0145 »

Offline tonyk

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Not sure I even recall what was taught at school ^lol^
I am just watching massively blown 4trn FED balance sheet with almost no inflationary pressures. As printed money is not being spent, just sitting at banks and contributing to asset bubbling... I am definitely not an expert on deflationary money, apologies.


The problem was that “monetarism” required a constant “velocity” of existing money -- the number of transactions each dollar could support. Under a gold standard, the velocity of money seemed to be constant over short and long periods of time, but when the dollar/gold link was broken, velocity went haywire. I like to use a “hot potato” as a metaphor in this case. When the dollar is losing its value relative to gold, because there are more dollars than are being demanded, holders of dollars try to get rid of them faster, as if passing a hot potato from hand to hand. When the dollar is gaining value relative to gold, as in a deflation where dollars are scarce, the potato is cool and is passed from hand to hand much more slowly.


'Re: ‘Monetarism’

Monetarism is an economic system built around the idea that economic growth can be facilitated by having the money supply grow at a slow, steady rate. It is a system wholly associated with Milton Friedman and his work at the University of Chicago in the 1950s and 1960s, as he provided a counterweight to the dominance of the Keynesian economics of that era. Because it relies on the management of the quantity of money available to consumers of goods and services in the system, it is “demand-side” in orientation. Keynesians ask us to believe that if the government manages the amount of money available to consumers by altering tax and spending policies, production (the supply of goods) to meet consumer demand would automatically follow. Demand would create supply. The chief difference with monetarists is that tax and spending policies would be of little moment if the Federal Reserve would get the aggregate amount of money in circulation right. Still, in Friedman’s model, production would follow automatically in response to the right money in people’s pockets.

 The Encyclopedia Britannica edition of 1975 actually had Friedman write its “macropedia” section on money. He opened his discussion of “the monetarist view” by denigrating the Keynesians. “[They predicted] “a great postwar depression if war spending [after 1945] was not replaced by other government spending. But government spending fell precipitously in the U.S. and elsewhere without ill effect. The analysis of the Keynesians had called for ‘cheap money’ policies -- that is, low interest rates -- with a view to stimulating investment and thereby avoiding mass unemployment. These policies proved in the main to be unnecessary; where they were adopted they were consistently followed by inflation that could be restrained only by abandoning the cheap-money policies.” Friedman, identified at the end of the article only as “M.Fr.,” continued:


""A re-examination of the Great Depression of the 1930's demonstrated that, contrary to a general belief, it had been a tragic testament to the great power of monetary policy, not to its impotence. The U.S. Federal Reserve System could have prevented the decline of one-third in the quantity of money that occurred from 1929 to 1933. Had it done so, the evidence indicates, the depression would have been far milder and briefer. Most important of all, extensive empirical research demonstrated that the velocity of money, far from moving to offset changes in the quantity of money, had generally moved in the same direction and reinforced the effect of these changes.""

The key flaw in Friedman’s exposition is where he refers to the “velocity” of money as having failed to speed up to offset the decline in the “quantity” of money. In our classical, supply model, there is never any reason for the “velocity” of money to change as long as the “money” is defined as a specific weight of gold -- which it was in the period 1929-1932. On Friedman’s supposition that if the velocity of money would remain constant during the most cataclysmic economic event of the century -- the Crash of 1929 and the Depression that followed -- he built a monetarist model which eliminated “velocity” as a variable.

 

'
« Last Edit: September 30, 2014, 09:03:04 pm by dat peg doe »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

velocity of money is the result of low demand to hold.... it does not create a low demand to hold.
inflation is a supply driven event.
hyperinflation is a demand driven event... ie demand to hold goes to 0.

High velocity is the result of hyperinflation loss of demand while the currency is still a unit of account and used in trade.   You must buy/sell with it so you get "in and out" as quickly as you can to avoid losses from holding.

You can have high velocity of trades with increasing demand in an economy that is very dynamic with low transaction cost overhead.
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Offline kisa

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Not sure I even recall what was taught at school ^lol^
I am just watching massively blown 4trn FED balance sheet with almost no inflationary pressures. As printed money is not being spent, just sitting at banks and contributing to asset bubbling... I am definitely not an expert on deflationary money, apologies.

Offline tonyk

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Interesting theoretical thread, but let's get closer to real. Assuming rather optimistic $100bn market cap for BTSX within next 5-10 years, under 200% reserve policy there is unlikely to be more than 20bn bitUSD flying around. That's like money supply created by rather small regional bank by lending $200k each to 100k local homebuyers. Systematically not as relevant for the FED to get worried. Ultimately later on, FED would integrate bitUSD into measuring money supply, but in that case all of you would be so rich that you might not care... ^^
 +5% +5% +5%
With regards to whether bitUSD creates downward pressure on USD, I sense Xeldal's and fussyhands' arguments need synthesis. The more often existing USD or bitUSD changing hands, the higher inflationary pressure...

...Now, this seems like something you have learned at school. Unfortunately....
If by tying up 2xBTSX a bitUSD is created that is turning over more often than 2×BTSX, then it's increasing money supply and its velocity. If bitUSD is then sitting in your wallet for yield purposes, that shouldn't count as money supply increase. The downward pressure on USD depends both on USD amount in circulation and its turnover velocity. If all existing paper USD are hidden under matresses, demand is great. If all USD are spent immediately by all actors, then demand for paper USD can be easily satisfied...
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline kisa

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Interesting theoretical thread, but let's get closer to real. Assuming rather optimistic $100bn market cap for BTSX within next 5-10 years, under 200% reserve policy there is unlikely to be more than 20bn bitUSD flying around. That's like money supply created by rather small regional bank by lending $200k each to 100k local homebuyers. Systematically not as relevant for the FED to get worried. Ultimately later on, FED would integrate bitUSD into measuring money supply, but in that case all of you would be so rich that you might not care... ^^

With regards to whether bitUSD creates downward pressure on USD, I sense Xeldal's and fussyhands' arguments need synthesis. The more often existing USD or bitUSD changing hands, the higher inflationary pressure...

If by tying up 2xBTSX a bitUSD is created that is turning over more often than 2×BTSX, then it's increasing money supply and its velocity. If bitUSD is then sitting in your wallet for yield purposes, that shouldn't count as money supply increase. The downward pressure on USD depends both on USD amount in circulation and its turnover velocity. If all existing paper USD are hidden under matresses, demand is great. If all USD are spent immediately by all actors, then demand for paper USD can be easily satisfied...
« Last Edit: September 27, 2014, 08:47:31 pm by kisa0145 »

Xeldal

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BitUSD are not USD. They are a dynamic bundle of BTSX. BitUSDs increase the supply of USD as much as mining BTC does. In other words, they don't. More BitUSD doesn't even directly affect the market cap of BTSX, since all BitUSD are not created "out of thin air" and are collateralized by BTSX. (However, since they are collateralized by 200%, this increases the demand for BTSX, thus having the effect of driving up the price :) )

I said the EFFECT is to create USD.  I know that it doesn't actually create USD, but it creates something that can serve as USD and thus dilutes the demand for USD.  Supply and demand determine price.  If you create something that can serve interchangeably with USD that increases the supply and dilutes the demand, reducing price.

In order to create 1 bitUSD, which may be used as 1 USD equivalent.  You would first have to tie up 2 USD (equivalent) worth of BTSX to do it.  So your effectively decreasing not increasing the available supply of spendable USD and its equivalents. 

You've taken 2 USD out of circulation to produce 1

Not really.  Lets say you use 2 USD to by 2 USD worth of BTSX and then use those BTSX to short/create 1 BitUSD.  Now there are 3 "USD equivalents" floating around.  The 2 USD that you spent on BTSX (which were not destroyed, but where promptly spent by the person selling their BTSX) and the 1 BitUSD.

By that same logic, just by me giving someone 2 USD for 2 USD worth of BTSX there are now 4 USD equivalents floating around. I'm taking 2 of those equivalents and making 1 by creating 1 bitUSD, so your right there are 3, but there were 4.

I don't think so.  "2 USD worth of BTSX" is clearly NOT the equivalent of "2 USD".  There is very different demand for "2 USD worth of BTSX" compared to "2 USD", largely because of the volatility of BTSX.  However the demand for BitUSD may actually be very similar to the demand for USD.  This would mean that increasing the supply of BitUSD may have a similar effect as increasing the supply of USD, but increasing the supply of BTSX would not have a similar effect as increasing the supply of USD.

value equivalents, not usability or investment equivalents.

No ones talking about increasing the supply of BTSX, but If I were able, with the same terms, I'd imagine it would require 2 USD to create 1 USD worth of BTSX leaving the same result.

I'm not making any valuation outside of a moments time. Nor am I making any distinction on usability, because clearly a bitUSD then is not currently equivalent to USD.  At this moment for this example if I give you 2 dollars for 2 dollars worth of BTSX.  That's 4 dollars total value involved in this closed system, ignoring all other factors.  When I use 2 of those USD value equivalents (BTSX) to create 1 bitUSD I have effectively removed(locked up) 1 USD of value from the system. 

Where there were 4 items each transferable to 1 real USD.  After creating a bitUSD, now there are only 3 items each transferable to 1 real USD.


Offline fussyhands

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If you view BitUSD as the DAC creating an IOU USD that is settled in BTSX then everyone who extends credit is effectively issuing dollars in circulation as long as people trust that credit.

My definition of a "naked short" is a fractionally collateralized position.    So these are collateralized shorts.

A short is when you borrow an equity and then sell it, thereby incuring the obligation to later buy the equity in order to return it to the entity you borrowed it from.  A "naked short" means that the equity wasn't "borrowed" before selling it.  In other words, on behalf of one of its shorting clients, the brokerage sells an equity that it doesn't actually have to someone else.  It probably has plenty of collateral, say in dollars, to cover the short, though, no?  I assume in most/all cases the brokerage imposes the same collateral requirements on its customers for a naked short as it does for a short. There would be no reason for a brokerage to not collect collateral from its customers who are shorting, just because the brokerage is going to sell an equity it doesn't actually have.  Perhaps I don't understand this...

 
They do have the effect of competing with demand for other forms of USD just like corporate debt and treasuries compete with demand for FED notes.

Someone buying BitOverstock is not actually increasing the supply of Overstock shares, but they are competing with the demand for them.   Overstock shares are a security and entitle the owner to a percentage of all profits and assets of Overstock and also confer voting rights.   BitOverstock is not increasing the supply or diluting the claim on Overstock assets.    All it does is remove speculative demand from Overstock's shares which allows them to be priced more accurately based upon fundamentals.

I think speculative demand is very important part of price discovery.  Don't you reference prediction markets all the time?  The wisdom of the crowd is often a better indicator of the future profits of a company (and thus the present value of the profit stream and therefore the value of the equity) that simply looking at current earnings, etc.

At any rate, competing for demand will have a similar negative effect on stock price as the Overstock CEO claims shorting does.  Especially where a company does not pay dividends.  In that case, it should be nearly identical.

Also, naked shorts do not dilute the claim on a company's assets.  There are still a limited number of shares, and the assets will be divided among the holders of those shares.  (To the extent that people who bought the long positions on a naked short do not all end up owning the equity, I suppose they could probably sue the brokerage in the case of an equity liquidation...)
   
I think it would be even clearer if we lived in a society where governments didn't protect shareholders from liability of companies.  In this case one might want BitOverstock to be exposed to the price without actually owning Overstock and being exposed to the liability. 

USD is a concept, a number, an accounting entry nothing more.   I think of USD as a "measure of value" like a "meter" or "foot" where the measure of that value changes based upon market forces.  BitUSD is just a container of BTSX that dynamically adjusts its contents to track the "measure of value" society associates with "US Dollar".

Ya I get that.  But to the extent it emulates USD, the BitUSD container will soak up some of the demand.
« Last Edit: September 27, 2014, 08:26:41 pm by fussyhands »

Offline fussyhands

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BitUSD are not USD. They are a dynamic bundle of BTSX. BitUSDs increase the supply of USD as much as mining BTC does. In other words, they don't. More BitUSD doesn't even directly affect the market cap of BTSX, since all BitUSD are not created "out of thin air" and are collateralized by BTSX. (However, since they are collateralized by 200%, this increases the demand for BTSX, thus having the effect of driving up the price :) )

I said the EFFECT is to create USD.  I know that it doesn't actually create USD, but it creates something that can serve as USD and thus dilutes the demand for USD.  Supply and demand determine price.  If you create something that can serve interchangeably with USD that increases the supply and dilutes the demand, reducing price.

In order to create 1 bitUSD, which may be used as 1 USD equivalent.  You would first have to tie up 2 USD (equivalent) worth of BTSX to do it.  So your effectively decreasing not increasing the available supply of spendable USD and its equivalents. 

You've taken 2 USD out of circulation to produce 1

Not really.  Lets say you use 2 USD to by 2 USD worth of BTSX and then use those BTSX to short/create 1 BitUSD.  Now there are 3 "USD equivalents" floating around.  The 2 USD that you spent on BTSX (which were not destroyed, but where promptly spent by the person selling their BTSX) and the 1 BitUSD.

By that same logic, just by me giving someone 2 USD for 2 USD worth of BTSX there are now 4 USD equivalents floating around. I'm taking 2 of those equivalents and making 1 by creating 1 bitUSD, so your right there are 3, but there were 4.

I don't think so.  "2 USD worth of BTSX" is clearly NOT the equivalent of "2 USD".  There is very different demand for "2 USD worth of BTSX" compared to "2 USD", largely because of the volatility of BTSX.  However the demand for BitUSD may actually be very similar to the demand for USD.  This would mean that increasing the supply of BitUSD may have a similar effect as increasing the supply of USD, but increasing the supply of BTSX would not have a similar effect as increasing the supply of USD.

Offline bytemaster

If you view BitUSD as the DAC creating an IOU USD that is settled in BTSX then everyone who extends credit is effectively issuing dollars in circulation as long as people trust that credit.

My definition of a "naked short" is a fractionally collateralized position.    So these are collateralized shorts. 

They do have the effect of competing with demand for other forms of USD just like corporate debt and treasuries compete with demand for FED notes.

Someone buying BitOverstock is not actually increasing the supply of Overstock shares, but they are competing with the demand for them.   Overstock shares are a security and entitle the owner to a percentage of all profits and assets of Overstock and also confer voting rights.   BitOverstock is not increasing the supply or diluting the claim on Overstock assets.    All it does is remove speculative demand from Overstock's shares which allows them to be priced more accurately based upon fundamentals.   

I think it would be even clearer if we lived in a society where governments didn't protect shareholders from liability of companies.  In this case one might want BitOverstock to be exposed to the price without actually owning Overstock and being exposed to the liability. 

USD is a concept, a number, an accounting entry nothing more.   I think of USD as a "measure of value" like a "meter" or "foot" where the measure of that value changes based upon market forces.  BitUSD is just a container of BTSX that dynamically adjusts its contents to track the "measure of value" society associates with "US Dollar". 

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Xeldal

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BitUSD are not USD. They are a dynamic bundle of BTSX. BitUSDs increase the supply of USD as much as mining BTC does. In other words, they don't. More BitUSD doesn't even directly affect the market cap of BTSX, since all BitUSD are not created "out of thin air" and are collateralized by BTSX. (However, since they are collateralized by 200%, this increases the demand for BTSX, thus having the effect of driving up the price :) )

I said the EFFECT is to create USD.  I know that it doesn't actually create USD, but it creates something that can serve as USD and thus dilutes the demand for USD.  Supply and demand determine price.  If you create something that can serve interchangeably with USD that increases the supply and dilutes the demand, reducing price.

In order to create 1 bitUSD, which may be used as 1 USD equivalent.  You would first have to tie up 2 USD (equivalent) worth of BTSX to do it.  So your effectively decreasing not increasing the available supply of spendable USD and its equivalents. 

You've taken 2 USD out of circulation to produce 1

Not really.  Lets say you use 2 USD to by 2 USD worth of BTSX and then use those BTSX to short/create 1 BitUSD.  Now there are 3 "USD equivalents" floating around.  The 2 USD that you spent on BTSX (which were not destroyed, but where promptly spent by the person selling their BTSX) and the 1 BitUSD.

By that same logic, just by me giving someone 2 USD for 2 USD worth of BTSX there are now 4 USD equivalents floating around. I'm taking 2 of those equivalents and making 1 by creating 1 bitUSD, so your right there are 3, but there were 4.




Offline fussyhands

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BitUSD are not USD. They are a dynamic bundle of BTSX. BitUSDs increase the supply of USD as much as mining BTC does. In other words, they don't. More BitUSD doesn't even directly affect the market cap of BTSX, since all BitUSD are not created "out of thin air" and are collateralized by BTSX. (However, since they are collateralized by 200%, this increases the demand for BTSX, thus having the effect of driving up the price :) )

I said the EFFECT is to create USD.  I know that it doesn't actually create USD, but it creates something that can serve as USD and thus dilutes the demand for USD.  Supply and demand determine price.  If you create something that can serve interchangeably with USD that increases the supply and dilutes the demand, reducing price.

In order to create 1 bitUSD, which may be used as 1 USD equivalent.  You would first have to tie up 2 USD (equivalent) worth of BTSX to do it.  So your effectively decreasing not increasing the available supply of spendable USD and its equivalents. 

You've taken 2 USD out of circulation to produce 1

Not really.  Lets say you use 2 USD to by 2 USD worth of BTSX and then use those BTSX to short/create 1 BitUSD.  Now there are 3 "USD equivalents" floating around.  The 2 USD that you spent on BTSX (which were not destroyed, but where promptly spent by the person selling their BTSX) and the 1 BitUSD.

Xeldal

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BitUSD are not USD. They are a dynamic bundle of BTSX. BitUSDs increase the supply of USD as much as mining BTC does. In other words, they don't. More BitUSD doesn't even directly affect the market cap of BTSX, since all BitUSD are not created "out of thin air" and are collateralized by BTSX. (However, since they are collateralized by 200%, this increases the demand for BTSX, thus having the effect of driving up the price :) )

I said the EFFECT is to create USD.  I know that it doesn't actually create USD, but it creates something that can serve as USD and thus dilutes the demand for USD.  Supply and demand determine price.  If you create something that can serve interchangeably with USD that increases the supply and dilutes the demand, reducing price.

In order to create 1 bitUSD, which may be used as 1 USD equivalent.  You would first have to tie up 2 USD (equivalent) worth of BTSX to do it.  So your effectively decreasing not increasing the available supply of spendable USD and its equivalents. 

You've taken 2 USD out of circulation to produce 1

Offline fussyhands

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This is interesting.  As far as I can see bitUSD is competing with the USD just as much as DOGE or EUROs.  All these competing currencies lessen demand for each other.  People who were holding USD sold it to buy bitUSD, or BTC or CNY or any other currency. 

Therefore bitUSD is inflating the USD by lessening demand for it, the same as any currency.  When a country stops accepting USD for oil that lessens demand for it in that country causing USD's to find their way back to the USA where they cause inflation.  Hence the petrodollar being forced on people at the point of a gun (one of the first things the US did after invading Iraq was switch their oil back to USD from EUROs).  That's why we don't here horrible things about Saudi Arabia (despotic regime) from the mainstream media, because they still price their oil in USD so we like them.  So yes I would say it is inflating it, but no more than any other currency. 

This is if we say that inflation is the weakening of a currency due to the demand vs unit ratio decreasing.

If you think about it, if half of the users of the USD suddenly died (lets hope not) and for some reason all the other users carried on using USD the supply would have effectively doubled without printing any more USD, resulting in inflation.  So inflation isn't just about money creation but is about demand vs number of units.

Interesting point.  I would add however that the closer the analog the greater the reduction in demand and the greater the inflation of the currency.  BTC is analogous to USD in some ways, but is also very different in its volatility.  So it absorbs some of the demand for USD but can never absorb demand that is contingent on low volatility (at least as long as it is highly volatile).  BitUSD on the other hand is more analogous to USD because it's value is pegged to USD, and thus can absorb even demand that is contingent on low volatility.

Nevertheless, you make a good point.  All currencies reduce demand for all other currencies to some degree...