Thanks BM. I don't see an answer to my basic question though. What ever is earned by BTS holders through transaction fees and arbitrage, is ultimately paid by bitAsset users. How much do we think bitAsset users are willing to pay in fees and spreads over the course of a year? Call it X%. Now spread that income over a BTS capital base that, by virtue of the collateral requirements, must be at at a minimum 3x as large. BTS holders earn, at a maximum, and even at peak assets in the billions of dollars, an average of X/3 % in income per annum from bitAssets. What do we think is reasonable for X and X/3? Is that enough for BTS owners to justify holding their BTS, or do they require the prospect of other income sources? I think the latter, and that's why I'm trying to encourage some discussion of potentialities around and beyond bitAssets, looking at bitAssets (and bitUSD in particular) as the fuel in a bigger bitShares economy rather than the primary income source. What is your view?
In the original design demand for BitUSD would drive the price of BitUSD over $1 which would mean that money could be made by shorting BitUSD. When this happens and no one is willing to sell BitUSD for $1 or even $1.10 then eventually shorts would take the bet that BTS must be worth more until BitUSD falls back to $1.00.
Understood. But the returns to such traders are limited by what users of bitAssets are prepared to pay away, and for transactional efficiency I believe that must ultimately be small. Initially for first movers it could be large, but over time as bitAsset users wise up to the costs, their demand will be contingent on low costs and spreads, and reduce BTS traders potential income.
Every buyer of BitUSD is effectively buying a bundle of BTS and their willingness to hold BitUSD is based upon the fact that they value the BTS as a form of collateral. So perhaps you could say every BitUSD represents $0.33 worth of demand for BTS rather than 3x.
Here I think you are saying that a marginal buyer of bitUSD (from fiat) creates marginal demand for BTS, and from that inferring that the BTS price needs to go up with BitAsset demand. But the latter is no fait accompli, and that's where I think a certain complacency lies.
While I agree that bitAsset owners are effectively selling a put option on the value of the BTS collateral (ie. they are exposed to a decline of that collateral under $1, and therefore fractionally long BTS**), there are other factors that affect the supply and demand for BTS (e.g. regulation, confidence, income), and these will all regulate the price for BTS.
For example, if the BTS price looked over-inflated, BTS holders wanting to reduce their exposure could easily take advantage of bitAsset demand by creating $1 of bitAsset (through a simultaneous long and short, and adding $3 of BTS to the collateral pool), then selling the bitAsset to raise $1, which passes the risk of a decline below $1 to the bitAsset owner (i.e. they now have some low level protection). In net terms, a derivative has been created between the bitAsset owner and the short to meet the bitAsset demand, but the BTS price is not bid up at all.
Further if BTS owners as a group became net sellers, then even in the face of extraordinary bitAsset premiums, the selling pressure could still force down the BTS price, lead to margin calls and forced buy-backs of the bitAsset, and release BTS from the collateral pool for sale. While the potential return from trading the bitAsset premium might mitigate this, it could not necessarily stop it. Indeed it would probably force bitAsset owners to question their collateral security and temper their demand. Confidence in BTS ultimately places a lid on bitAssets too.
I think it is too complacent to just believe that bitAsset demand must drive BTS up. To make the point more poignant, suppose bitAssets were free (which would increase demand even more) and that as a result BTS never will derive any income stream from them whatsoever. What incentive is there for anybody to ever own BTS? If its for growth alone, who would be the last bag-holder, or the second-last? And if nobody wants to be a holder of BTS, who will facilitate the growth of bitAssets?
(** for technical interest, bitAsset owners are really selling a deep out-of-the-money put option (selling a put = a long exposure in delta terms) on a notional of $3 worth of BTS struck at a price of 1/3 the current BTS price (i.e. they are bearing the loss should the 3x value in BTS fall below $1 in value). The delta or effective exposure would be a fractional variable (not like a fixed $0.33) that depends mainly on BTS price and volatility (option pricing models).)