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Offline fussyhands

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Aren't BitAssets sort of like naked short selling?
« on: September 27, 2014, 05:07:33 PM »

Naked Short Selling

Let's say I create a BitAsset called BitOverstock.  Lots of people start shorting BitOverstock into existence creating a big quantity of the asset.  Now many people who would have gone long actual Overstock stock instead choose to buy BitOverstock spreading the demand for Overstock stock over a larger supply and thus depressing the price.

Isn't this the same as naked short selling?

The only difference is that with a naked short sale you are actually making a promise to deliver the real stock, whereas with a BitAsset you are only promising to deliver enough BTSX to buy the real stock.  In practice there isn't much difference.  The effect on price discovery is the same.  Naked shorting artificially increases the supply of a stock thus decreasing its price by frustrating price discovery through supply and demand.  BitAssets would appear to do the same thing.

Legality of Creating Parallel USD

If US gov determines that BitAssets are equivalent to naked short selling will that lead to trouble considering that naked short selling is illegal?

Now, if Bitshares became very widespread, and lots of people were holding BitUSD instead of actual USD, wouldn't this in effect increase the pool of USD, thus driving down the value?  How would the various agencies of the US government think about this?  Would it be something they want to stop?  It has some similarities to fractional reserve banking which also increases the money supply.  But there are differences too...  Are banks allowed to print GoldmanDollars pegged to the value of USD?  I don't think so.  Is this going to result in regulatory troubles?

Offline xeroc

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #1 on: September 27, 2014, 05:22:13 PM »
Isn't there a difference between bitAssets for currencies such as USD, EUR, ... and bitAssets for companies such as overstock, ebay?

imho it does not make ANY sense to have a bitAsset for overstock or ebay, because they do not have "ONE" price ..

you may mix this up with user-issued assets that can be used for IPOs of companies .. but in theses you cannot 'short"!!
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Offline fussyhands

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #2 on: September 27, 2014, 05:27:46 PM »
Isn't there a difference between bitAssets for currencies such as USD, EUR, ... and bitAssets for companies such as overstock, ebay?

imho it does not make ANY sense to have a bitAsset for overstock or ebay, because they do not have "ONE" price ..

you may mix this up with user-issued assets that can be used for IPOs of companies .. but in theses you cannot 'short"!!

See the following wiki link which discusses BitAAPL:  http://wiki.bitshares.org/index.php/BitShares_X#Please_explain_BTSX_vs._BitAssets_again

I don't know the status of non currency BitAssets that track real assets like AAPL, but it seems to be something that the community is considering.

But regardless, what about my overall point?  Doesn't BitUSD have the effect of increasing the supply of USD?  Will that be a regulatory issue?

Offline fluxer555

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #3 on: September 27, 2014, 05:39:04 PM »
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 :) )

Offline speedy

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #4 on: September 27, 2014, 05:41:06 PM »
Let's say I create a BitAsset called BitOverstock.  Lots of people start shorting BitOverstock into existence creating a big quantity of the asset.  Now many people who would have gone long actual Overstock stock instead choose to buy BitOverstock spreading the demand for Overstock stock over a larger supply and thus depressing the price.

You make a very interesting point. But there are so many places that create "parallel" assets, so BTSX is hardly unique in that respect.

-Banks do it all the time through fractional reserve lending, again spreading out the demand for dollars or whatever.
-Spread betting companies let you take a position without going into the market (theoretically until they hedge).
-Gold trading is almost completely fictional.

Why cant BTSX get in on the game as well?
« Last Edit: September 27, 2014, 05:43:28 PM by trader »

Offline tonyk

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #5 on: September 27, 2014, 05:46:43 PM »
Let's say I create a BitAsset called BitOverstock.  Lots of people start shorting BitOverstock into existence creating a big quantity of the asset.  Now many people who would have gone long actual Overstock stock instead choose to buy BitOverstock spreading the demand for Overstock stock over a larger supply and thus depressing the price.

You make a very interesting point. But there are so many places that create "parallel" assets, so BTSX is hardly unique in that respect.

-Banks do it all the time through fractional reserve lending.
-Spread betting companies let you take a position without going into the market (theoretically until they hedge).
-Gold is almost completely fictional.

Why cant BTSX get in on the game as well?

Haven't you guys figured it out yet? - There is no place for anything else but BTC. Cause it does not. Even talking about anything else is blasphemy...
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline fussyhands

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #6 on: September 27, 2014, 05:56:04 PM »
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.

Offline matt608

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #7 on: September 27, 2014, 05:58:40 PM »
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.
« Last Edit: September 27, 2014, 06:05:05 PM by matt608 »

Offline fussyhands

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #8 on: September 27, 2014, 06:08:10 PM »
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...

Offline Xeldal

Re: Aren't BitAssets sort of like naked short selling?
« Reply #9 on: September 27, 2014, 06:53:09 PM »
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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Re: Aren't BitAssets sort of like naked short selling?
« Reply #10 on: September 27, 2014, 07:08:57 PM »
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.

Offline Xeldal

Re: Aren't BitAssets sort of like naked short selling?
« Reply #11 on: September 27, 2014, 07:22:56 PM »
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 bytemaster

Re: Aren't BitAssets sort of like naked short selling?
« Reply #12 on: September 27, 2014, 07:25:11 PM »
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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Offline fussyhands

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #13 on: September 27, 2014, 08:02:33 PM »
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 fussyhands

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Re: Aren't BitAssets sort of like naked short selling?
« Reply #14 on: September 27, 2014, 08:21:35 PM »
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 »

 

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