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Main => General Discussion => Topic started by: starspirit on October 29, 2014, 12:52:12 am

Title: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 12:52:12 am
There is an underlying assumption I see often that BTS market cap must always expand with bitUSD market cap, because demand for bitUSD forces up demand for BTS, the collateral. And further for the pool of all bitAssets. But is this logically true? I found this complex to think through, so would genuinely not be surprised if I were wrong. But my conclusion is that the statement is not necessarily true - one does not necessarily drive the other.

First we need to recognise that at least from a valuation perspective, there is no reason why BTS should by necessity demand a higher valuation as a direct consequence of bitUSD growth. If all BTS ever earned as income from providing the platform were some small transaction fee for bitUSD usage (which in theory could be close to zero), its fair valuation should relate to that income, not the market cap of bitUSD.

Now let's think about the market dynamic.

1) Imagine somebody demands a huge amount of bitUSD today, but that overall market expectations for BTS valuation are unchanged. This party goes to an exchange and buys bitUSD with their fiat USD, driving the price above 1 fiat USD.
2) Seeing this favourable price, some arbitragers buy bitUSD with their BTS, sell it at the exchange for the higher fiat USD price, buy back their original BTS with fiat USD, and pocket a profit. This leads to an equalisation of the bitUSD premium on the exchanges and on the BTS/bitUSD exchange, but has had no net effect on BTS demand.
3) Now seeing this favourable BTS/bitUSD price another set of arbitragers that are current holders of BTS are able to come in and create new supply in bitUSD through shorts. The arbitrage is to short bitUSD (making them longer BTS), and to sell BTS on the exchanges, which maintains their overall exposure to BTS. Again there has been no net effect on BTS demand. But importantly BTS has moved from the hands of the arbitragers into the collateral pool to support the larger supply of bitUSD.

The end result of this sequence is that there has been no change in the net demand for BTS, but that there has been a movement of BTS into the collateral pool.

If demand were ongoing, and BTS value were unchanged, this sequence could be repeated until all the BTS sat in the collateral pool. The only condition is that the market cap of BTS needs to remain more than 3x the market cap of bitUSD, otherwise its likely that forced covering of the shorts due to under-collateralisation would begin to unwind the supply and so release BTS collateral from the pool again (which incidentally, on its own still has no net effect on BTS demand).

The logical conclusion I draw, if this is correct (???),  is that the market cap of BTS bears no direct relation to the market cap of bitUSD, except that the market cap of bitUSD bumps against a ceiling as it approaches 1/3 the market cap of BTS. The only economic relationship that can drive growth for BTS is whether BTS derives greater value of transaction and other platform fees from the larger supply of bitUSD.

Can anybody see the flaw if there is one?

[Edit 12 Nov 2014: After having reviewed the discussion and thought some more on it, I now interpret the result like this. For the market cap of bitAssets to grow up to the ceiling, it does not require BTS market cap to rise at all. The growth can be facilitated completely by arbitragers without increasing their net demand for BTS, if the market is stubborn in the valuation it places upon BTS. However, the result still allows the potential for the market to increase its evaluation of BTS if bitAsset markets grow, which in all likelihood it will do if enough people follow the meme that "bitAsset growth justifies higher valuations of BTS". But this is not a given, and if BTS valuation were constrained by other issues, even strong demand for bitUSD could not be fulfilled beyond the ceiling.

As a minor technical point, I also now believe that in step 3 of the sequence above, these players are not strictly implementing a risk-free arbitrage (in actual fact, there is no risk-free arbitrage for shorts). Instead they are speculating that the premium of the bitUSD price over the peg will fall, which is not guaranteed if demand remains consistently strong. This does not alter the argument or conclusions above, it only affects their incentive to participate in meeting the demand.]



 
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Riverhead on October 29, 2014, 12:54:57 am
Did you factor in that BTS is collateral for ALL assets, not just bitUSD?
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 12:59:07 am
Did you factor in that BTS is collateral for ALL assets, not just bitUSD?
The same logic would follow, the only difference would be that the sum of the market caps of all the bitAssets would bump up against a ceiling of 1/3 the market cap of BTS. But still BTS valuation would not necessarily grow as a direct result of growth in the market cap of bitAssets. It's growth would only relate to the platform fees.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: toast on October 29, 2014, 12:59:14 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: tonyk on October 29, 2014, 01:02:56 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.

Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 01:10:12 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk
The ceiling exists because at that point all of the BTS is in the collateral pool. The only possible movement in the supply of bitAssets from there is that they are released. For example, this could be forced covering if the value of BTS fell compared to the amount of bitAssets being supported.

I agree bts market cap will be a lot higher for quite some time. But it will be return potential that drives it forward.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 01:15:03 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: tonyk on October 29, 2014, 01:20:27 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: gamey on October 29, 2014, 01:26:24 am


Yep.  Increasing bitUSD supply takes away supply of btsx.  That doesn't lead to price increase if there was no demand for BTSX to begin with.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: tonyk on October 29, 2014, 01:28:15 am


Yep.  Increasing bitUSD supply takes away supply of btsx.  That doesn't lead to price increase if there was no demand for BTSX to begin with.

Yes if there is no demand for something to begin with the price tends to be close to 0. Reducing the supply to this something something does not help much.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 29, 2014, 01:29:28 am
I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: gamey on October 29, 2014, 01:36:17 am


Yep.  Increasing bitUSD supply takes away supply of btsx.  That doesn't lead to price increase if there was no demand for BTSX to begin with.

Yes if there is no demand for something to begin with the price tends to be close to 0. Reducing the supply to this something something does not help much.

When I said demand, I meant demand on a market.  I just think people can have BTSX sitting around, convert it into bitUSD and it has done nothing because the supply/demand on the BTSX market hasn't changed.  Now if the BTSX converting to bitUSD is bought off the market, we have a different result.

Although I am not considering how this impacts the bitUSD market when I buy bitUSD.  The supply goes down there too.

edit - Although I agree that in general buying bitUSD will increase the price of BTSX, it isn't necessarily the case.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 01:41:28 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 01:48:44 am
I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.
I think what you are saying is that as long as BitAssets are growing, this will be positive for the perception of growth in BTS. And I agree with that. But there is no direct economic linkage apart from the fees.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 29, 2014, 01:56:48 am
I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.
I think what you are saying is that as long as BitAssets are growing, this will be positive for the perception of growth in BTS. And I agree with that. But there is no direct economic linkage apart from the fees.

No, I am not just talking about the perception. I am saying if the BTS/USD market was symmetric and there was a lot of liquidity, people could convert between BTS and USD easily without changing the price (same with BitAssets and USD or other assets because of arbitrage opportunities). For the price of BTS to be driven up, we need more demand for buying BTS with USD to get into the BitShares system than selling BTS for USD to get back into the fiat system. If people are just moving into the system to make some profits off speculation or gambling, or move money around using the internet, but then are ultimately cashing out into fiat to pay for real world goods/services, I expect the market to be mostly symmetric and therefore expect little to no growth. But if people instead keep their savings in the BitShares system, if they pay for goods/services in BitCurrencies and the merchants then pay their employees in the earned BitCurrencies, the BTS sell demand in outside exchanges will be significantly reduced (limited to paying taxes and other goods/services that haven't yet adopted the new technology) because it will instead go into the BitAsset shorts/longs (or even just holding BTS as savings). This causes an asymmetry in the outside exchanges which causes the larger BTS buy demand to drive the price of BTS up relative to USD.

Edit: Notice that nothing in my explanation says that the BitAsset growth causes an increase in the value of BTS necessarily. People could in theory just keep all of their wealth in BTS. So I guess I am not actually arguing against your original statement in the OP. But having BitCurrencies is useful in keeping the wealth in the BitShares system rather than being pulled back out into the fiat system (thus leading to the asymmetry that drives BTS value up) because BitCurrencies have price stability and BTS does not. This is one of the big advantages BTS has over BTC in growing the value of the token since people do not have to sell BTS for USD to pay for goods/services priced in USD (of course assuming the merchant can pay their employees and supply chain in BitUSD).
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 02:24:26 am
I tried to come up with a coherent argument and failed. The best I can come up with is that with a growing DAC there consistently is USD sell pressure and BTS buy pressure in outside exchanges. The other way around (selling BTS to buy USD) is smaller than buying BTS with USD because people can instead park their money as BitUSD instead. This asymmetry, which must exist as long as the amount of BitUSD (and other BitAssets) are growing, should continue to cause an average net increase in the price of BTS with respect to the underlying real world assets.
I think what you are saying is that as long as BitAssets are growing, this will be positive for the perception of growth in BTS. And I agree with that. But there is no direct economic linkage apart from the fees.

No, I am not just talking about the perception. I am saying if the BTS/USD market was symmetric and there was a lot of liquidity, people could convert between BTS and USD easily without changing the price (same with BitAssets and USD or other assets because of arbitrage opportunities). For the price of BTS to be driven up, we need more demand for buying BTS with USD to get into the BitShares system than selling BTS for USD to get back into the fiat system. If people are just moving into the system to make some profits off speculation or gambling, or move money around using the internet, but then are ultimately cashing out into fiat to pay for real world goods/services, I expect the market to be mostly symmetric and therefore expect little to no growth. But if people instead keep their savings in the BitShares system, if they pay for goods/services in BitCurrencies and the merchants then pay their employees in the earned BitCurrencies, the BTS sell demand in outside exchanges will be significantly reduced (limited to paying taxes and other goods/services that haven't yet adopted the new technology) because it will instead go into the BitAsset shorts/longs (or even just holding BTS as savings). This causes an asymmetry in the outside exchanges which causes the larger BTS buy demand to drive the price of BTS up relative to USD.
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable. The increased fees to BTS owners from transactional use of the platform is what will make them more valuable. To be clear I am not saying there is no relationship at all between the success of each - there quite clearly is. I am saying that market cap growth is a related but indirect driver, which means it may not grow as fast as bitAssets themselves.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Empirical1.1 on October 29, 2014, 02:36:44 am
Even though you can buy small amounts of BitUSD from a large collateral pool without directly effecting the CAP with that specific purchase,  under the current system, the BTSX CAP still has to be at least 2X the total BitAssets in circulation on average, because I can't buy 1 BitUSD without the market CAP being at least $2 after the transaction.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: tonyk on October 29, 2014, 02:51:47 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 03:07:29 am
Even though you can buy small amounts of BitUSD from a large collateral pool without directly effecting the CAP with that specific purchase,  under the current system, the BTSX CAP still has to be at least 2X the total BitAssets in circulation because I can't buy 1 BitUSD without the market CAP being at least $2 after the transaction.
Yes, actually 3x, because the long puts up $1 of BTS collateral, and the short puts up 2.
But still bitAsset market cap growth does not force BTS market cap growth.
The limiting condition can work both ways. BitAsset growth can drive up to the ceiling because BTS doesn't grow as much, or BTS valuation can fall driving the ceiling down and supply back out of bitAssets.
I'm not trying to comment on what this all means yet, I'm still trying to work that out! But as a start I would be careful with any proposals around subsiding bitAsset users from BTS funds.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 29, 2014, 03:11:52 am
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

There is a limited amount of BTS shares. If more people want to be in the BitShares system (whether by holding BTS or holding BitAssets which are backed by BTS) this will increase the demand on BTS. Obviously wanting to hold BTS by purchasing it with fiat increases the demand on BTS. But wanting to hold BitUSD by purchasing it with USD also increases the demand on BTS as well. If the BitUSD supply does not grow, the increased demand on BitUSD will cause its value to rise above the value of USD. BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually. An equilibrium should be reached where the profit motive of shorting BitUSD on BitShares is balanced with the profit motive of selling BTS for USD at a higher price on the exchanges because of all of the disappearing BTS sell pressure. Basically arbitrage means that it shouldn't matter too much whether you buy BTS with USD and then use the BTS to buy BitUSD or you purchase BitUSD with USD directly; since this demand into the BitShares system isn't going to raise the price of BitUSD over the long term (because of the peg) it must raise the price of BTS.

Edit: And the above is assuming that the inactive BTS (the hodlers not the traders) aren't changing their behavior. At the ceiling you describe, there are no inactive BTS holders that could change their mind because they are all locked up as collateral in shorts. In theory, the change in BitAsset market cap does not need to correlate with BTS market cap (assuming we are not at that ceiling) because of the change in behavior of some fraction of the BTS holders. For example, the BitUSD short demand in my previous example could be satisfied by BTS hodlers deciding to become traders and short BitUSD back to its peg. If enough people do this, then I can imagine that the BTS sell pressure at exchanges doesn't need to disappear and thus the price of BTS doesn't need to grow relative to USD. But if this process continues to happen, eventually the supply of BTS that are willing to transition from a hodler to a trader will be exhausted, and this has to mean that the price of BTS relative to USD has to rise. This needs to happen at the 3x ceiling you describe, but will very likely happen before then because not every BTS holder will be willing to short.

So I think what this all means is that I agree with your statement that we should not be "subsidizing BitAsset users from BTS funds" and I am also very skeptical of the claim of 3x benefits by funneling users into BitUSD through attractive yields rather than to just BTS. But I do believe that attracting outside wealth into the BitShares system in general (whether it is BTS or BitAssets) does directly grow the value of BTS. And obviously BitUSD (a price stable cryptocurrency) is critical to attracting wealth to BitShares in the first place, and having a yield rate close to 5% is a powerful marketing message since it is better than what people can get from traditional banks (although I think having it be any higher than that is a waste of resources because of diminishing returns in marketing).
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 03:37:36 am
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually.
Here you are assuming the arbitrager is happy to have a longer exposure on BTS (via short BitUSD) simply to take advantage of the arbitrage. But if their view on BTS is unchanged (my original assumption), they actually need to sell a corresponding amount of BTS for USD on the exchange to make their arbitrage risk-free. I think that changes the remainder of the argument you make? See if you are still happy with it...

Edit: Also note I wrote this before I saw your edit! So my comment only relates to the arbitrage discussion.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 03:44:27 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 29, 2014, 03:49:03 am
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually.
Here you are assuming the arbitrager is happy to have a longer exposure on BTS (via short BitUSD) simply to take advantage of the arbitrage. But if their view on BTS is unchanged (my original assumption), they actually need to sell a corresponding amount of BTS for USD on the exchange to make their arbitrage risk-free. I think that changes the remainder of the argument you make? See if you are still happy with it...

I am not sure I understand, if BitUSD is trading at a premium the BTS holder wouldn't buy BitUSD using BTS at the existing premium prices to make money off arbitrage (as you state in the OP nevermind that was something else). They would short BitUSD so they can later buy BitUSD when it returns back to the peg and make profit that came from the person who was desperate enough to buy BitUSD using BTS during the premium price.

The arbitrager's view on BTS (in terms of USD) has not changed. What has changes is that the price of BTS (in terms of BitUSD) has dropped, or BitUSD is trading at a premium. So even if their valuation of BTS hasn't changed, they are still motivated to short BitUSD on the BitShares decentralized exchange to make profit in the short term.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 04:12:05 am
If there is increased network utility in using bitCurrencies, more people will want to use the system. That does not on its own require an increased exposure to BTS shares, or make them more valuable.

BTS that could have been sold for USD on exchanges will instead go into shorting BitUSD at the premium price because of the greater profit potential there (since market participants expect the price to eventually go back to the peg). The increase in shorts should satisfy BitUSD demand, increase BitUSD supply, and settle its price back down to the peg eventually.
Here you are assuming the arbitrager is happy to have a longer exposure on BTS (via short BitUSD) simply to take advantage of the arbitrage. But if their view on BTS is unchanged (my original assumption), they actually need to sell a corresponding amount of BTS for USD on the exchange to make their arbitrage risk-free. I think that changes the remainder of the argument you make? See if you are still happy with it...

I am not sure I understand, if BitUSD is trading at a premium the BTS holder wouldn't buy BitUSD using BTS at the existing premium prices to make money off arbitrage (as you state in the OP nevermind that was something else). They would short BitUSD so they can later buy BitUSD when it returns back to the peg and make profit that came from the person who was desperate enough to buy BitUSD using BTS during the premium price.

The arbitrager's view on BTS (in terms of USD) has not changed. What has changes is that the price of BTS (in terms of BitUSD) has dropped, or BitUSD is trading at a premium. So even if their valuation of BTS hasn't changed, they are still motivated to short BitUSD on the BitShares decentralized exchange to make profit in the short term.
Yes, they will short BitUSD (go longer BTS) but as a hedge they must also sell BTS on the exchange, otherwise their BTS exposure has changed and its not risk-free. (If they did not do this, even though they may make money on the premium to the feed price, they will be exposed the the movement of the feed price during their holding period). As a result there is no new net demand for BTS from the arbitrager.

Also you suggested that the increased demand for bitUSD, if not ultimately resulting in a rise in price of bitUSD (because this is arbitraged away), must go somewhere in the system and lead to a rise in price of BTS. But this is not required because the supply of bitUSD has increased to meet the demand, absorbing that pressure.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: tonyk on October 29, 2014, 05:37:49 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Seriously try to pick a lane... somewhere... if they cover(without more or equal new bitUSD created) this means that there is more supply than demand for bitUSD at that moment... so in this scenario the price of BTSX will likely go down....  but you original question is if the BTSX price will go up if the demand for bitUSD goes up....
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 29, 2014, 06:29:49 am
Yes, they will short BitUSD (go longer BTS) but as a hedge they must also sell BTS on the exchange, otherwise their BTS exposure has changed and its not risk-free. (If they did not do this, even though they may make money on the premium to the feed price, they will be exposed the the movement of the feed price during their holding period). As a result there is no new net demand for BTS from the arbitrager.

I see what you are saying about the exposure. But I still think there is net demand when someone holding USD wants to buy BitUSD. Let me go through it all again more carefully so I don't make a mistake. But it's pretty late so I am sure I will make mistakes and I am counting on you to point them out.

2) Seeing this favourable price, some arbitragers buy bitUSD with their BTS, sell it at the exchange for the higher fiat USD price, buy back their original BTS with fiat USD, and pocket a profit. This leads to an equalisation of the bitUSD premium on the exchanges and on the BTS/bitUSD exchange, but has had no net effect on BTS demand.

I don't see why this doesn't have a net effect on BTS demand. If I buy BitUSD using BTS on the decentralized exchange, I drive the price of BitUSD relative to BTS up, but haven't yet affected the price of BTS relative to USD. I am also exposed to the dollar rather than to BTS like I want to be. So to correct that I first sell the BitUSD for USD at a premium due to the high demand for BitUSD at the outside exchanges and then use some of the USD to buy back my BTS position, and some USD is left over as profit from the arbitrage. The buy demand of BTS using USD on the exchange drives the price of BTS relative to USD up.

Now compare this to the case where the desperate BitUSD buyer was to take an alternative path to get more bang for their buck. They could have used their USD to buy BTS and then used the BTS to buy BitUSD on the decentralized exchange. Because of the higher liquidity on those exchanges, they could have gotten more BitUSD for their USD. The difference between the two cases would have been the extra profit that I would have not realized through arbitrage if the BitUSD buyer was smarter.

In both cases, there should be USD purchasing BTS (but not the other way around) which drives the price of BTS relative to USD up.

3) Now seeing this favourable BTS/bitUSD price another set of arbitragers that are current holders of BTS are able to come in and create new supply in bitUSD through shorts. The arbitrage is to short bitUSD (making them longer BTS), and to sell BTS on the exchanges, which maintains their overall exposure to BTS. Again there has been no net effect on BTS demand. But importantly BTS has moved from the hands of the arbitragers into the collateral pool to support the larger supply of bitUSD.

Yes, if they have to maintain their exact same exposure there is no net effect on BTS demand from this step. Let me go in more detail with an example.

Let's say I have 4000 BTS which is currently worth 100 USD. I am happy with this exposure. The decentralized exchange however is trading 42 BTS for 1 BitUSD, meaning BitUSD is at a premium compared to USD. This may be because someone pursuing an arbitrage opportunity described in the previous step bid the price of BitUSD up while trying to convert BTS into BitUSD. There is an arbitrage opportunity here that I want to take advantage of without changing my exposure. In other words, if the price of BTS (in USD) drops in half, I don't want the USD value of my holdings to drop by more than half. I use 3000 BTS to short 24 BitUSD, and use the other 1000 BTS to buy 25 USD (yes this is BTS sell pressure). My short at 0% interest is matched by someone who purchased 24 BitUSD using 1000 BTS. The amount of BTS I own that is locked in the collateral is 4000 BTS, but of course I owe the network 24 BitUSD (luckily I also own 25 USD). Therefore, my exposure is more or less what it was before (assuming the peg more or less holds in the medium term). When the peg returns back to normal (40 BTS for 1 BitUSD), I can sell 25 USD for about 1000 BTS (this is the BTS buy pressure that counteracts the earlier BTS sell pressure which results in no net effect on BTS value in terms of USD through this process) and use 960 BTS to buy the 24 BitUSD I need to cover my short and get back my 4000 BTS. The end result of this process is that I am back to where I started except I gained an extra 40 BTS (ignoring exchange fees and assuming high liquidity on the BTS/USD market).


So based on this analysis I would say the second step has no net effect on BTS/USD but the first step does increase the value of BTS relative to USD.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 06:43:02 am
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Seriously try to pick a lane... somewhere... if they cover(without more or equal new bitUSD created) this means that there is more supply than demand for bitUSD at that moment... so in this scenario the price of BTSX will likely go down....  but you original question is if the BTSX price will go up if the demand for bitUSD goes up....

Let me clarify where my understanding has got to.

1) It does not matter whether there in an increase in bitUSD demand from fiat, or a decrease in bitUSD demand toward fiat. Neither will translate into price pressure on BTS in the absence of a change in market opinion on BTS.

I postulated the former in my original argument, and the latter is simply the opposite set of actions. Essentially arbitragers never need to change their position on BTS (in fact should not, if they want the arbitrage to be risk-free) to facilitate an increase or decreased in bitUSD demand against fiat USD.

The important thing to additionally note is that:

2) If there is an increase in bitUSD demand from BTS in the bitshares market, this does translate into downward price pressure on BTS against fiat USD. And a decrease in demand for bitUSD toward BTS does translate into upward price pressure on BTS against fiat USD.

I postulated the former of these in another thread here, which remains uncountered...https://bitsharestalk.org/index.php?topic=10456.msg137622#msg137622. It is a little contrary to BMs stated view in the same thread.

These dynamics are not inconsistent at all. In fact they make sense to me when I think about what the source of demand is in each case.

Your counter to my original argument in this thread (that increasing demand from fiat USD does not increase price pressure on BTS in the absence of a change in market opinion on BTS) was that with more BTS locked up as collateral, supply is reduced, and this should cause price to rise. I eventually realised there is no BTS locked up for any definite period at all, because shorts at the margin can unwind at any point immediately to release collateral if the BTS price in fiat rises. In the absence of a change in market opinion on BTS, this negates the initial impetus to rise.

Originally I approached your counter from a different angle, that is now irrelevant I think. I hope you understand that the purpose of this thread was to illuminate through discussion, and not be too impatient for perfect clarity of one's argument.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 07:05:56 am

2) Seeing this favourable price, some arbitragers buy bitUSD with their BTS, sell it at the exchange for the higher fiat USD price, buy back their original BTS with fiat USD, and pocket a profit. This leads to an equalisation of the bitUSD premium on the exchanges and on the BTS/bitUSD exchange, but has had no net effect on BTS demand.

I don't see why this doesn't have a net effect on BTS demand. If I buy BitUSD using BTS on the decentralized exchange, I drive the price of BitUSD relative to BTS up, but haven't yet affected the price of BTS relative to USD. I am also exposed to the dollar rather than to BTS like I want to be. So to correct that I first sell the BitUSD for USD at a premium due to the high demand for BitUSD at the outside exchanges and then use some of the USD to buy back my BTS position, and some USD is left over as profit from the arbitrage. The buy demand of BTS using USD on the exchange drives the price of BTS relative to USD up.

Now compare this to the case where the desperate BitUSD buyer was to take an alternative path to get more bang for their buck. They could have used their USD to buy BTS and then used the BTS to buy BitUSD on the decentralized exchange. Because of the higher liquidity on those exchanges, they could have gotten more BitUSD for their USD. The difference between the two cases would have been the extra profit that I would have not realized through arbitrage if the BitUSD buyer was smarter.


Thanks arhag.
You are right in that there is a difference in net demand in the two markets. There is a decline in demand for BTS in the decentralised exchange as bitUSD is bid up. And there is an increase in demand for the same quantity in the exchange market where BTS is bought to get back to the original exposure. The net effect of these is zero, though there is an opposite effect in each market. That creates the arbitrage opportunity that is exploited in step (3) of my sequence, as shorts in the decentralised exchange increase (increasing BTS demand) and sales are made at the exchanges (reducing demand there). These net to zero also, but work to cancel the effects on the different exchanges.

In your example of the desperate bitUSD buyer, in that case he is also increasing BTS demand on the exchanges, and then decreasing demand by the same quantity in the decentralised exchange when he buys his bitUSD there. These net to zero. The arbitrage opportunity opened up is then exploited in the same way in step 3 of the sequence, again with net zero change in demand overall, but cancelling the initial effects.

To be honest I did not read through your quantitative demonstration due to time constraints (sorry), but you look to have gotten to answer that I would have expected.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 29, 2014, 07:20:41 am
You are right in that there is a difference in net demand in the two markets. There is a decline in demand for BTS in the decentralised exchange as bitUSD is bid up. And there is an increase in demand for the same quantity in the exchange market where BTS is bought to get back to the original exposure. The net effect of these is zero, though there is an opposite effect in each market.

I disagree that you can consider these two effects as canceling each other out...

That creates the arbitrage opportunity that is exploited in step (3) of my sequence, as shorts in the decentralised exchange increase (increasing BTS demand) and sales are made at the exchanges (reducing demand there). These net to zero also, but work to cancel the effects on the different exchanges.

If you go through my understanding of your step 3, you will see that indeed the buy pressure on BTS in the decentralized exchange cancels out the sell pressure from step 2, but I don't think the net effect on BTS in the BTS/USD exchange from step 3 is negative thus canceling out the positive effect on BTS in the BTS/USD exchange from step 2. The arbitrager in step 3 would first sell BTS for USD to maintain the same exposure (if they really cared about that), but once the peg on the decentralized exchange is back to normal they would sell the USD back to BTS. Thus in the same step (step 3) there is a net zero effect on the price of BTS relative to USD.

Edit: Darn. Actually sorry. During the covering step I would again create negative BTS pressure in the decentralized exchange as I tried to buy the necessary BitUSD to cover. So this only works if there are people willing to short the necessary amount at the new adjusted price to fulfill the BitUSD buy order without raising the price.

It still seems incredibly counter-intuitive to me that money flowing into the system shouldn't increase the value of BTS. The argument that the increase in supply of BitUSD absorbs this pressure without raising the USD value of BTS doesn't resonate with me. I have to think about it more.

Perhaps the argument may just be that there is a lot of short demand that already exists but cannot be matched because of the price feed. After step 2, the buy pressure of BTS on the BTS/USD exchange causes the value of BTS to rise relative to USD. However, the buy pressure of BitUSD on the BTS/BitUSD exchange does not cause the value of BTS to fall relative to BitUSD by much, if at all, because of all the shorts just waiting to be matched. Then if you follow my arguments of step 3 with this in mind, you should see why their should be no net effect in either the BTS/USD or BTS/BitUSD exchanges either. The combined net effect of steps 2 and 3 is that the value of BTS rises relative to USD but only to the extent that there are enough BTS willing to be used to short BitUSD but are currently unable to do so because of the price feed restriction. I don't know, just a late night hypothesis that may be wrong.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: ticklebiscuit on October 29, 2014, 07:22:30 am
Making more bitdollar is like temporary burns of btsx.  Do delegatea burns increase value of the btsx left?

That will make your answer...
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 29, 2014, 09:18:43 am

It still seems incredibly counter-intuitive to me that money flowing into the system shouldn't increase the value of BTS. The argument that the increase in supply of BitUSD absorbs this pressure without raising the USD value of BTS doesn't resonate with me. I have to think about it more.

Perhaps the argument may just be that there is a lot of short demand that already exists but cannot be matched because of the price feed. After step 2, the buy pressure of BTS on the BTS/USD exchange causes the value of BTS to rise relative to USD. However, the buy pressure of BitUSD on the BTS/BitUSD exchange does not cause the value of BTS to fall relative to BitUSD by much, if at all, because of all the shorts just waiting to be matched. Then if you follow my arguments of step 3 with this in mind, you should see why their should be no net effect in either the BTS/USD or BTS/BitUSD exchanges either. The combined net effect of steps 2 and 3 is that the value of BTS rises relative to USD but only to the extent that there are enough BTS willing to be used to short BitUSD but are currently unable to do so because of the price feed restriction. I don't know, just a late night hypothesis that may be wrong.
There may be something true in this. There probably is some latent demand for BTS among short orders that exists only because of the ability to leverage, and would not otherwise be satisfied by these people buying BTS outright elsewhere. So even in the absence of a change of view on BTS, these fills will not be fully hedged out, facilitating some rise of BTS price in fiat. My initial thought is that the extent of this price rise is ultimately limited by the marginal BTS selling that eventually kicks in to match this new demand, again given the assumption that the market has not changed its outlook on BTS. How significant that is I would have to think about more, but I agree there is at least an effect here.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: tonyk on October 29, 2014, 03:09:02 pm
Yeah, I am also not convinced that bitusd demand necessarily causes bts demand. I can imagine bitusd demand pushing past the ceiling you describe without anyone deciding to sell their bitusd for bts. Yes there is a profit motive to do so, but what if all the people who realize this are already all-in bts? Wouldn't this be the "up and away" scenario where bitusd/bts doesn't stop climbing until it all collapses?

For the record, I think in practice bts market cap will be far in excess of all bitassets combined.

Sent from my SCH-I535 using Tapatalk

No, bitUSD demand reduces BTSX supply (available supply, due to the need min 2x BTSX to stay locked as collateral (2x=3x currently, not for too long IMHO)), which in turn drives the price up.
Not sure how locking supply improves valuation. Its still in the hands of those demanding it. If a public company is bought out and becomes illiquid, does its valuation rise? I

Think of it in terms of supply and demand.

Valuations are made up measurement, so someone can sell their services and sound 'informed' and 'intelligent. Prices are driven by market forces not valuations that someone comes up with.

[edit] Wait ,what? Which supply is in hands of whom? The one demanding it?
Forget the word valuation. Think instead what the market thinks something is worth. What they think something is worth does not change if some portion of the supply is locked away, because their return on the asset is unchanged.

Hmmm no. 
I just bought a phone that is worth (in my mind) about $200-250, but no one is selling it for less then $400 and everybody else is buying it for that much. And the alternative is to buy something that I value at $100-$125 and is available for $650 plus. The point is my subjective valuation does not matter. What matters is my best buying/doing nothing (potentially selling in other cases) strategy. And that is determined buy supply/demand and no valuation of mine changes that. And the supply is determined by the total available shares in our case.
Individuals will differ in what they think something is worth, but the market reflects some sort of average that has not changed. I suppose if there were only one free-floating share, it might go to the highest bidder? So I can see some sense in what you're saying...
However, I now think that doesn't matter because the BTS collateral is not really locked away at all. If shorts see the BTS price go higher, at the margin some of these can immediately cover, release their collateral, and sell. So there really is no reduced supply.

Seriously try to pick a lane... somewhere... if they cover(without more or equal new bitUSD created) this means that there is more supply than demand for bitUSD at that moment... so in this scenario the price of BTSX will likely go down....  but you original question is if the BTSX price will go up if the demand for bitUSD goes up....

Let me clarify where my understanding has got to.

1) It does not matter whether there in an increase in bitUSD demand from fiat, or a decrease in bitUSD demand toward fiat. Neither will translate into price pressure on BTS in the absence of a change in market opinion on BTS.

I postulated the former in my original argument, and the latter is simply the opposite set of actions. Essentially arbitragers never need to change their position on BTS (in fact should not, if they want the arbitrage to be risk-free) to facilitate an increase or decreased in bitUSD demand against fiat USD.

The important thing to additionally note is that:

2) If there is an increase in bitUSD demand from BTS in the bitshares market, this does translate into downward price pressure on BTS against fiat USD. And a decrease in demand for bitUSD toward BTS does translate into upward price pressure on BTS against fiat USD.

I postulated the former of these in another thread here, which remains uncountered...https://bitsharestalk.org/index.php?topic=10456.msg137622#msg137622. It is a little contrary to BMs stated view in the same thread.

These dynamics are not inconsistent at all. In fact they make sense to me when I think about what the source of demand is in each case.

Your counter to my original argument in this thread (that increasing demand from fiat USD does not increase price pressure on BTS in the absence of a change in market opinion on BTS) was that with more BTS locked up as collateral, supply is reduced, and this should cause price to rise. I eventually realised there is no BTS locked up for any definite period at all, because shorts at the margin can unwind at any point immediately to release collateral if the BTS price in fiat rises. In the absence of a change in market opinion on BTS, this negates the initial impetus to rise.

Originally I approached your counter from a different angle, that is now irrelevant I think. I hope you understand that the purpose of this thread was to illuminate through discussion, and not be too impatient for perfect clarity of one's argument.
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.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: matt608 on October 29, 2014, 03:21:04 pm
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.

Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: bytemaster on October 29, 2014, 04:48:55 pm
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.

 
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: monsterer on October 29, 2014, 06:46:32 pm
At the risk of blundering into an intelligently thought out argument with a massive oversimplification, isn't there some core intuitive sense we can bring to bear on the original question:

"Does bitUSD market cap growth force BTS market cap to grow?"

How can buys of bitUSD possibly directly increase the cap of BTS when the only thing backing bitUSD is BTS? Surely the only thing which can happen is that the cap of BTS reduces by exactly the amount which the cap of bitUSD increased?
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Empirical1.1 on October 29, 2014, 07:03:14 pm
Not directly related but the valuation of BTS will also reflect BitAssets rate of growth.

A healthy BTS blockchain will need a certain minimum average CAP to support say $500 million worth of BitAssets.

So if there are $20 million worth of BitAssets growing at say 500% a year, then depending on how far forward people value BTS, even a relatively small amount of growing BitAssets in circulation can create a big BTS CAP/Valuation. So in that way consistent net BitAsset demand/growth has a big multiplier effect on BTS CAP.

At the risk of blundering into an intelligently thought out argument with a massive oversimplification, isn't there some core intuitive sense we can bring to bear on the original question:

"Does bitUSD market cap growth force BTS market cap to grow?"

How can buys of bitUSD possibly directly increase the cap of BTS when the only thing backing bitUSD is BTS? Surely the only thing which can happen is that the cap of BTS reduces by exactly the amount which the cap of bitUSD increased?

No I don't think so it's like locking up the BTS.

If Bitcoin had BitAssets - Say there are 4 million Bitcoin in active circulation. To create 1 BitUSD backed by Bitcoin you'd have to remove $3 worth of Bitcoin from circulation. So it doesn't cause the CAP to fall but ultimately causes it to rise because more and more Bitcoin is being removed from circulation. So there is less Bitcoin supply in circulation to meet the same level of Bitcoin demand.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: monsterer on October 29, 2014, 07:41:15 pm
No I don't think so it's like locking up the BTS.

Hmmm, but you can't have something for nothing - that's the intuition here.

Quote
If Bitcoin had BitAssets - Say there are 4 million Bitcoin in active circulation. To create 1 BitUSD backed by Bitcoin you'd have to remove $3 worth of Bitcoin from circulation. So it doesn't cause the CAP to fall but ultimately causes it to rise because more and more Bitcoin is being removed from circulation. So there is less Bitcoin supply in circulation to meet the same level of Bitcoin demand.

Isn't the following true:

Code: [Select]
market cap = price of coin * coins in circulation
So, take the coins out of circulation, the instantaneous cap has to decrease?
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: xeroc on October 29, 2014, 07:43:09 pm
depends on the definition: "coins in circulation"
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Empirical1.1 on October 29, 2014, 08:01:59 pm
No I don't think so it's like locking up the BTS.

Hmmm, but you can't have something for nothing - that's the intuition here.

Quote
If Bitcoin had BitAssets - Say there are 4 million Bitcoin in active circulation. To create 1 BitUSD backed by Bitcoin you'd have to remove $3 worth of Bitcoin from circulation. So it doesn't cause the CAP to fall but ultimately causes it to rise because more and more Bitcoin is being removed from circulation. So there is less Bitcoin supply in circulation to meet the same level of Bitcoin demand.

Isn't the following true:

Code: [Select]
market cap = price of coin * coins in circulation
So, take the coins out of circulation, the instantaneous cap has to decrease?

No CAP = price of coin * total coins

Like Satoshi's 1 million or whatever Bitcoins are out of circulation.

But the CAP of Bitcoin represents the Bitcoin price * all Bitcoin, not just the ones in circulation.

I didn't do any of this stuff past high school but I think it's just supply and demand.
Like with oil they can influence the price by the amount of supply they put on the market.
Removing supply has the effect of increasing price while adding supply lowers the price.

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.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: monsterer on October 29, 2014, 09:21:18 pm
I didn't do any of this stuff past high school but I think it's just supply and demand.
Like with oil they can influence the price by the amount of supply they put on the market.
Removing supply has the effect of increasing price while adding supply lowers the price.

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 can be no free lunch. If you pay for your bitUSD with BTS, there is a value exchange. The terminology and processes are indeed complex but it must come down to this, surely?
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Empirical1.1 on October 30, 2014, 12:08:20 am
I didn't do any of this stuff past high school but I think it's just supply and demand.
Like with oil they can influence the price by the amount of supply they put on the market.
Removing supply has the effect of increasing price while adding supply lowers the price.

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 can be no free lunch. If you pay for your bitUSD with BTS, there is a value exchange. The terminology and processes are indeed complex but it must come down to this, surely?

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.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 30, 2014, 12:23:53 am
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.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: zerosum on October 30, 2014, 12:42:09 am
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.


Here we go... the price of BTSX went up :))) I was just trying to say that if the price stays there (unchanged), we can not do what you said is possible.... It is possible but the price of BTSX just has to go up.    :)

Do you like your own proof?  :)
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: starspirit on October 30, 2014, 01:03:05 am
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.


Here we go... the price of BTSX went up :))) I was just trying to say that if the price stays there (unchanged), we can not do what you said is possible.... It is possible but the price of BTSX just has to go up.    :)

Do you like your own proof?  :)
I wouldn't call it a proof, and there's some open ends, but I'll let it rest for now. Thanks.
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Empirical1.1 on October 30, 2014, 01:04:29 am
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.

Use BitUSD as gold jewellery and BTS as gold if you prefer.

The more Gold jewellery demand there is the higher the demand for gold and the higher the price. (The gold price often actually rises in September specifically because of the Indian wedding season gold jewellry demand.)

The Gold jewellery while not consumed is removed from the gold supply (warehoused if you like) but can & is often recycled and put back on the gold market. Provided net jewellry demand is higher than recycled jewellry coming back on the market, it has a direct effect on the gold price.



Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: Ander on October 30, 2014, 01:53:15 am
Everyone being confused about this reminds me of...

(http://img.memerial.net/memerial.net/2446/put-20-each-in-a-box.jpg)
Title: Re: Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?
Post by: arhag on October 30, 2014, 03:05:09 am
Everyone being confused about this reminds me of...

(http://img.memerial.net/memerial.net/2446/put-20-each-in-a-box.jpg)

Nice.

Now you need to add the fact that the box is locked with a key after they each put $20 in, and the troll on the left gives the troll on the right the key. Also the key could be used to successfully unlock the box, but doing so breaks the key in the process. The left troll could in theory then sell the locked box to the right troll if he wants, but since it is useless without the key (which itself is valuable since it unlocks the box) it is unlikely to be sold for $30 on the open market unless the price of the key drops significantly.

A rational actor would purchase the box and key if the cost of both together is less than the amount of cash inside (in this case $40). Initially, after going through this procedure, it would make a lot of sense if the market value of the locked box is $20 (since the left troll spent $20 to get the locked box in his possession) and the market value of the key is also $20 (since the right troll spent $20 to get the key in his possession). The prices can of course quickly diverge depending on what market participants speculate the difficulty (cost) will be of getting the key relative to value contained in the locked boxes. Now you need to add in the fact that any of the keys made for similar boxes can be used to unlock any of these types of boxes (even though the amount of cash in each box can be different). Then you need to add in the fact that an authority figure can come in a steal away a locked box from someone's possession and sell it on the open market if they notice that the amount of cash in the particular locked box is getting dangerously close to the current market price of keys (although they will give the owner back some of the profits from this operation).

After adding in all these new rules, the game has become far more complicated to analyze.