In re of bolded - No they can not just close the position to release collateral. Each individually of them can, but with unchanged demand for bitUSD it means that they will have to buy bitUSD to close the positions from other shorts (as in new) opening exactly the same position.
tonyk, they can also be closed against sellers. In the event that the market's opinion of BTS were unchanged, but the price of BTS jumped, then the feed price for bitUSD on the decentralised exchange is considered too low by the average market participant (i.e. BTS price too high). At the margin there would be more bitUSD buyers, more bitUSD short covers, and fewer new shorts at the current bitUSD/BTS price. bitUSD shorts being covered would then need to hit not just new shorts, but also outright sellers, in order to get filled. This would reduce supply and release collateral from the pool.
At some point if the sellers were too thin, and the bitUSD/BTS price went too far above the feed price, new shorts would then kick in again. Some of these would simply be arbitragers however, who would short bitUSD at a premium, while simultaneously selling part of their BTS exposure on a centralised exchange, thus not changing their risk profile to BTS, but picking up a risk-free profit. The selling pressure on the exchange from such arbs, as well as other marginal sellers, helps reduce the USD exchange price of BTS back towards equilibrium.
It took me a long while to think that through, I'm not 100% confident on it...
From what I can (might) understand, increasing bitasset demand results in the price of the popular bitasset creeping up above the peg. This incentivises short positions being taken against that bitasset vs btsx as people believe the bitasset will go back down to the peg price. Shorts can only be made by people holding BTSX. Therefore increased bitasset demand incentivises shorts, which incentivises the buying of BTSX for the purpose of shorting bitassets.
matt608, the shorts incentivised by the gap to the peg price want a risk-free arbitrage position, so they will offset by selling BTS on the exchanges. See earlier discussion in thread.
Every time a short order is filled it takes BTS from a BEAR and gives it to a BULL.
At the same time it took sell pressure off of the exchanges.
End result: 2 people are now willing to trust the blockchain for the value. Both the Bull and Bear trust the blockchain and the system to store their value. Thus increase in demand for BitUSD means in increase in demand to store value on the blockchain.
Another way to view it is this: demand for BitUSD depends upon the credit-worthiness of the blockchain itself. If demand picks up that means the credit-worthiness of the blockchain is growing which in turn means its investment potential is increasing.
Thanks BM. I agree that demand for bitUSD reflects increased trust in the block-chain. That may increase the value of shares in the blockchain, but its not a direct link to the market cap of bitAssets, and there are many other factors playing in that BTS valuation.
The primary implication of this thread is that bitAsset growth does not lead to a
market dynamic where any upward price pressure is applied to the BTS price. That can
only come from increased market perceptions of BTS. As a result, there needs to be a market expectation that BTS will derive tangible benefit from the growth of the platform. Growth in bitAssets may create many positives for the growth of BTS, such as through brand, trust, platform fees etc. But if the market for any reason caps the valuation potential of BTS, that flows back down to a cap on the potential growth of bitAssets. (So subsidy proposals as an example need to be considered cautiously in that context).
I'm still not sure this is entirely clear, but its the best I can do for now...
BTS locked up in BitAssets is removing BTS supply from the market so the existing demand has to chase less supply which creates a higher price.
There's a long line of discussion on this one, see my responses to tonyk. I don't think the supply is actually removed from the market, but its not an easy-to-follow argument, so somebody may spot a flaw in it. I would also add that even if some supply were locked away for a period of time, its not clear to me why this should increase the market cap of a share (as opposed to a currency).
Think of BitUSD as the product and BTS as the main ingredient.
BTS is the cocoa and BitUSD is the chocolate bar.
The more people that want chocolate bars, the more demand there is for cocoa.
The more demand there is for the limited cocoa (BTS) supply, the more the cocoa price rises.
Its not increasing the demand for cocoa (as in something being consumed), just the demand for cocoa to be warehoused. Whether its warehoused or not, the owners of the cocoa still earn the same return on it, and can choose whether or not to keep their cocoa in the warehouse, or trade it.