A related question:
For normal stocks, does buying options create demand for the underlying stock?
If so, does it matter whether they are close to the current price, well in the money, or well out of the money?
Ander, yes if its coming from fiat, it does create an immediate demand, for a fractional amount - see my response to jsidhu.
Its a complex calculation to determine how significant this is for a bitAsset. You previously mentioned my description of bitAsset buyers effectively selling a deep out-of-the-money put option on BTS as part of the package, which gives them a fractional long exposure to BTS. The nature of this option is quite exotic, because the strike is not fixed. BitAsset owners are only exposed if the BTS price loses 2/3rd in price in so fast a time that margin calls on shorts cannot be covered quickly enough to prevent under-collateralisation. Market liquidity and volatility will both be factors in this. Possibly the only way to determine these probabilities, and the fractional delta in the options, is through computer simulation, as they cannot be expressed through standard option-pricing formulae.
If the demand is coming from BTS (in the internal market), then the bitAsset buyer is relinquishing a full BTS exposure for a fractional one, so their bitAsset demand is actually creating an immediate supply of BTS that needs to be absorbed by other participants.
Can you explain the bold part, please. My first thought response is - the whole of this supply is immediately locked in collateral and effectively removed. But I suspect you mean something else.
I mean that somebody else needs to be willing to take up the BTS supply, or the BTS price needs to decline until somebody is willing to accept it. In the situation where we have a group of unsatisfied bitAsset sellers or unfilled shorts waiting in the queue, they will absorb the supply, because they want greater exposure to BTS. However, where this is thin, the bitAsset price will keep rising until it gets interest from other shorts or outright bitAsset sellers (they get a better entry price for their BTS as a result). If the bitAsset price on the internal market is then higher than on the external market as a result of this pressure, arbitragers will sell BTS to buy bitAsset (via fiat) on the external market and sell bitAsset on the internal market to lock in a profit. This also transfers sell pressure on BTS to the external market.
Other than not quite getting what do you mean by "...will sell BTS to buy bitAsset (via fiat)" and assuming you mean "sell BTS to buy bitAsset on the external market "
Yes, but said sell pressure is offset by 3x the buy pressure that the newly opened shorts provide...
It is actually quite simple:
Someone wants bitUSD. The usual way is:
-Buy BTS on external exchange (up pressure on BTS); + 1
-Sell BTS for bitUSD on the internal exchange for bitUSD (down pressure on BTS) - 1 ,but
- Simultaneously from the shorter (up pressure on BTS, 2x the force btw). + 2
The same happens if this new customer buys bitUSD directly, just somebody else is performing the first 2 steps for him/her.