BitShares Forum
Main => General Discussion => Topic started by: starspirit on November 12, 2014, 03:11:05 am
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I'm thinking about this is the context of bitshares = the future of banking.
BTS owners are like shareholders in "the bank".
bitAsset owners are like the depositors.
bitAsset shorts are like the borrowers.
(It should be recognised that none of these things are actually true, because all parties simply have different stakes in a decentralised platform. There is no entity and the terms are only used for comparison.)
Total deposits to total shareholder capital can build to a maximum of 1/3 (each deposit requires 3x backing), whereas traditional banks can be massively leveraged to say 20-30x (fractional reserving is incredibly dangerous, I'm against it, but just making a point of comparison).
Depositors get all the interest from the borrowers, there is no margin for the bank (traditional banks take an interest spread)
Depositors only pay transaction fees on the movements in their funds (and we really want these to be as minimal as possible because they are an economic friction or waste)
So here we have a bank that is capital intensive (limited deposit base) and much lower in margin (low cost-based transaction-only fees) than any traditional bank. Income on shareholder capital, even at a point of huge market penetration, looks to be very small on the "deposit" business alone, unless we believe there will be enormous trading volume in bitAssets.
So although bitshares is fantastic for the customer, in its current form can it create enough value for the BTS holder?
Should we be looking at ways to improve profitability from bitAssets, cross-sell the user base into higher margin services with less fixed capital commitment, monetise the network value in other ways, or something else?
I am a BTS holder so obviously I believe in the value that will be made manifest somehow. But I am finding it hard to believe that bitAssets as a stand-alone source of value can deliver that return, unless others can suggest some better numbers. So what's the path, and what's the next profit source to look forward to?
[Edit 18 Nov 2014:
A number of people have made the argument that at least a certain set of BTS traders, being arbitragers, make money from the bitAsset premium that exists when demand outstrips supply, and that this income potential motivates arbitragers to bid up BTS. Apart from the fact that the trade envisioned is not strictly an arbitrage (i.e. there is no guarantee of profit), as I discuss deeper in this thread, there is also an economic argument for why the level of potential income to BTS holders from such a trade only marginally improves the attractiveness of BTS.
When bitAsset users pay a premium this is just another direct cost to them, in the same way that transaction fees are. If bitShares is promoted as the future of banking, and being more-cost efficient that traditional banking, how much are users going to be willing to pay away in transaction fees, entry/exit spreads etc, in a typical year, just for the convenience of using the currency? A few percent of their capital perhaps? Now distribute this income over the BTS capital base that is three times as large. Now even with the potential for "arbitrage" income, BTS holders are in the same boat as before. The income potential that bitAsset users will allow (as a transactional cost to them) is unlikely to be enough to justify arbitragers bidding up BTS to do the trade***. And indeed it should be our mission to reduce these basic transactional costs to users.
None of this is to say that traders won't bid up BTS if bitAssets grow. In fact, judging by all the responses I've had to this issue, the overwhelming meme is "bitAssets growing = great for BTS price". So I'm sure BTS will indeed rise as a result of this self-fulfilling perspective. That may indeed be good for a while if it helps fund development in other areas. But ultimately I believe that those prices will only be justified by additional income sources to bitAssets.
***[technical point: I also questioned whether arbitragers might increase demand because they get all the arbitrage income, not other BTS holders, justifying an increased price for at least those traders. However this must reduce the income opportunity for non-arbitrage BTS holders further, justifying a decreased price for all those other holders. Net, net, same price result as if everyone did arbitrage.]
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Should we be looking at ways to improve profitability of the existing business, cross-sell the user base into higher margin services with less fixed capital commitment, monetise the network value in other ways, or something else?
All of these. Think big!
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Should we be looking at ways to improve profitability of the existing business, cross-sell the user base into higher margin services with less fixed capital commitment, monetise the network value in other ways, or something else?
All of these. Think big!
That's cool - thinking big is great. Much much more will be required to convince professional investors with real capital that we actually have a plan.
If a big potential funder asks why hold the BTS, what are the key drivers of their future value?
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I'm thinking about this is the context of bitshares = the future of banking.
BTS owners are like shareholders in "the bank".
bitAsset owners are like the depositors.
bitAsset shorts are like the borrowers.
(It should be recognised that none of these things are actually true, because all parties simply have different stakes in a decentralised platform. There is no entity and the terms are only used for comparison.)
Total deposits to total shareholder capital can build to a maximum of 1/3 (each deposit requires 3x backing), whereas traditional banks can be massively leveraged to say 20-30x (fractional reserving is incredibly dangerous, I'm against it, but just making a point of comparison).
Depositors get all the interest from the borrowers, there is no margin for the bank (traditional banks take an interest spread)
Depositors only pay transaction fees on the movements in their funds (and we really want these to be as minimal as possible because they are an economic friction or waste)
So here we have a bank that is capital intensive (limited deposit base) and much lower in margin (low cost-based transaction-only fees) than any traditional bank. Income on shareholder capital, even at a point of huge market penetration, looks to be very small on the "deposit" business alone, unless we believe there will be enormous trading volume in bitAssets.
So although bitshares is fantastic for the customer, in its current form can it create enough value for the share owner?
Should we be looking at ways to improve profitability of the existing business, cross-sell the user base into higher margin services with less fixed capital commitment, monetise the network value in other ways, or something else?
I am a BTS holder so obviously I believe in the value that will be made manifest somehow. But I am finding it hard to believe that bitAssets as a stand-alone business can deliver that return, unless others can suggest some better numbers. So what's the path, and what's the next profit source to look forward to?
Making an investor pitch is probably going to attract enforcement by the SEC. Just don't go there and market it differently.
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If a big investor asks why invest into BTS, what are the key drivers of their future financial return?
Imagine we as a society collectively decided to use AAPL stock as a form of currency. And let us say we were confident that Apple wouldn't be diluting the shares or at most they would dilute it to a little less than double the number of shares currently (so say up to 10 billion shares of AAPL). If AAPL was going to become a replacement to our dollars (our trillions of dollars) over the next several years and assuming the velocity of money stayed more or less the same, wouldn't we expect the price of a share of AAPL to grow by an order of magnitude or more? Wouldn't this be true even if Apple stopped making iPhones and iPads and the earnings per share dropped, as long as the societal consensus of using AAPL as currency was maintained? And doesn't this tremendous growth from its increasing use as a currency make the normally large profits from Apple's consumer electronics sales look tiny and almost insignificant by comparison?
Now in the saturation stage when there wasn't much further adoption to be gained for AAPL to be used as a currency, the earnings per share metric would matter again. But even if the profits were small, it wouldn't mean that it would no longer be useful as a currency. It wouldn't mean people would dump their stake because the average real growth is smaller than other investments, just like people don't dump their cash even though its average real growth is negative! This is because holding on to (and ultimately using) some amount of a price stable currency is useful.
Now I know BTS is not a currency and all, but it is the only thing that backs currencies like BitUSD. A BitUSD is a claim on a variable amount of BTS selected from a larger amount of BTS locked as collateral. I do however think the degree to which the BTS in collateral is larger than the BTS claims by BitUSD and other BitCurrencies will have to shrink in the future (in other words, I think the minimum collateral ratios for BitCurrency shorts will have to be lowered in the future). But I think this will be a natural consequence as the volatility of BTS drops as it gets bigger and it starts to resemble a currency more and more.
So, I think the system can be a wonderful success even in the extreme case where the DAC never produces a profit (it should eventually stop diluting though and pay for all expenses with its revenue, aka transaction fees). People who invest in BTS would still get to experience unbelievable growth (at least until the saturation stage). After that point, if there are other services generating additional profits for the stakeholders, then that's even better. But I do not think that is necessary in order for BitShares to become a huge world-changing success. So the main focus should be to get people to adopt BitCurrencies so that this system can grow quickly, but we can also work on all the fun and useful Dapps that this platform makes possible in parallel.
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If a big investor asks why invest into BTS, what are the key drivers of their future financial return?
Imagine we as a society collectively decided to use AAPL stock as a form of currency. And let us say we were confident that Apple wouldn't be diluting the shares or at most they would dilute it to a little less than double the number of shares currently (so say up to 10 billion shares of AAPL). If AAPL was going to become a replacement to our dollars (our trillions of dollars) over the next several years and assuming the velocity of money stayed more or less the same, wouldn't we expect the price of a share of AAPL to grow by an order of magnitude or more? Wouldn't this be true even if Apple stopped making iPhones and iPads and the earnings per share dropped, as long as the societal consensus of using AAPL as currency was maintained? And doesn't this tremendous growth from its increasing use as a currency make the normally large profits from Apple's consumer electronics sales look tiny and almost insignificant by comparison?
Now in the saturation stage when there wasn't much further adoption to be gained for AAPL to be used as a currency, the earnings per share metric would matter again. But even if the profits were small, it wouldn't mean that it would no longer be useful as a currency. It wouldn't mean people would dump their stake because the average real growth is smaller than other investments, just like people don't dump their cash even though its average real growth is negative! This is because holding on to (and ultimately using) some amount of a price stable currency is useful.
Now I know BTS is not a currency and all, but it is the only thing that backs currencies like BitUSD. A BitUSD is a claim on a variable amount of BTS selected from a larger amount of BTS locked as collateral. I do however think the degree to which the BTS in collateral is larger than the BTS claims by BitUSD and other BitCurrencies will have to shrink in the future (in other words, I think the minimum collateral ratios for BitCurrency shorts will have to be lowered in the future). But I think this will be a natural consequence as the volatility of BTS drops as it gets bigger and it starts to resemble a currency more and more.
So, I think the system can be a wonderful success even in the extreme case where the DAC never produces a profit (it should eventually stop diluting though and pay for all expenses with its revenue, aka transaction fees). People who invest in BTS would still get to experience unbelievable growth (at least until the saturation stage). After that point, if there are other services generating additional profits for the stakeholders, then that's even better. But I do not think that is necessary in order for BitShares to become a huge world-changing success. So the main focus should be to get people to adopt BitCurrencies so that this system can grow quickly, but we can also work on all the fun and useful Dapps that this platform makes possible in parallel.
If ever BTS became a currency, it would be perfectly fair to say no yield would be required to support its value - its value is in exchange value alone. It seems like a very lofty position to shoot for though. With widespread block-chain technology, there could be thousands of variations, including bitshares forks, shooting for that space. As you almost infer, there's nothing to stop AAPL from putting its shares on a block-chain if it wants, and people may be more attracted to that because its much larger, more stable, better known, and more profitable than bitshares. So although I'm partial to the possibility, the big question is, what advantage can bitshares sustain in shooting for status as a form of money?
Then the other common argument I see is that we don't need to worry about profits on the way up, only when the growth is saturated. Now I will partially agree with this - the level of profits on the way up don't matter. But even before we reach that growth saturation stage, as things just start to slow down their rate of ascent, the potential for future profitability will become a concern of markets. This is the issue Amazon faces today, even though its growth is yet to be saturated.
Its also important because if the BTS price ever stops growing, it places a lid on how much bitAssets can be supported - even if that demand remains strong, sufficient collateral is not available for new supply.
So it may not be an issue today, but I think it will be one day....I'm happy to take the ride for now...
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Its also important because if the BTS price ever stops growing, it places a lid on how much bitAssets can be supported - even if that demand remains strong, sufficient collateral is not available for new supply.
Strong demand for bitassets forces the BTS price to rise due to arbitraging.
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Its also important because if the BTS price ever stops growing, it places a lid on how much bitAssets can be supported - even if that demand remains strong, sufficient collateral is not available for new supply.
Strong demand for bitassets forces the BTS price to rise due to arbitraging.
Commonly believed, but the arbitrage logic convinces me this is not the case, as I discuss here...https://bitsharestalk.org/index.php?topic=10690.0
New supply of bitUSD can be facilitated without any increased demand for BTS, at least while its below the ceiling of 1/3 value of BTS.
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bitshares will be like ACME and will take bitUSD for everything people think of using blockchains for. Prices will reflect the income it needs to generate so that its market cap can "justify" its bitasset market sizes, but everyone will always be willing to pay those prices because there's no other way to do it. Go big or go home
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Another potential source of income is the value of new shares from third-party DACS that snapshot on BTS. In that way the capital value embedded in the toolkit is being used to bring value to BTS holders beyond the bitAsset transaction fees alone. Is that a fair assessment? And what are the coming future prospects of that?
Also, what are the prospects for income from user-issued assets?
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bitshares will be like ACME and will take bitUSD for everything people think of using blockchains for. Prices will reflect the income it needs to generate so that its market cap can "justify" its bitasset market sizes, but everyone will always be willing to pay those prices because there's no other way to do it. Go big or go home
To paraphrase, I hear you saying something like "people will be willing to pay higher BTS prices because there is no other way that people can grow the bitAsset markets".
But these are actually different parties. Users of bitAssets do not need to own any BTS. And as a corollary BTS owners cannot justify their holdings purely on the basis of wanting to facilitate their own use of bitAssets. Its possible that bitAsset users may buy all the shares in BTS to ensure the price is "set right", but then they would need to own 3 times as much in BTS as they hold in bitAssets, not a very good customer proposition.
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The link between bitasset demand and BTS price is caused by another type of person: The trader who attempts to make a profit off of arbitrage.
Any time that bitasset demand becomes "too high" relative to the amount of BTS this trader has, if he wants to continue his arbitraging he must buy more BTSX so that he has enough ocllateral to create bitUSD (or whatever), and then sell it at a high price to meet the large demand that is driving the price above $1.00.
Therefore, this arbitrageur must buy BTS in the market, driving up its price, so that he can perfrom his arbitrage.
Any time that bitasset demand become "too low", the opposite effect happens, the arbitrageur covers his shorts, removing bitUSD from the system at a cost below $1.00. He then frees up his BTS. He could sell it in the market, lowering the price.
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The link between bitasset demand and BTS price is caused by another type of person: The trader who attempts to make a profit off of arbitrage.
Any time that bitasset demand becomes "too high" relative to the amount of BTS this trader has, if he wants to continue his arbitraging he must buy more BTSX so that he has enough ocllateral to create bitUSD (or whatever), and then sell it at a high price to meet the large demand that is driving the price above $1.00.
Therefore, this arbitrageur must buy BTS in the market, driving up its price, so that he can perfrom his arbitrage.
Any time that bitasset demand become "too low", the opposite effect happens, the arbitrageur covers his shorts, removing bitUSD from the system at a cost below $1.00. He then frees up his BTS. He could sell it in the market, lowering the price.
There's two big problems for this trader though.
First, contrary to what I even originally thought, when he tries to sell bitUSD at a premium, his trade is not an arbitrage, as there is no way he can guarantee a profit. This is because his profit is only realised when he closes his shorts, and that might still be at a premium to the peg. He is reliant of the market closing the premium through either a subsidence in demand (no guarantees) or more supply from other traders following in his wake (who then bear the same problem as he does). Of course he could keep rolling the shorts until the premium does eventually narrow, but there is no guarantee how long this will take, what return he might get, or whether the premium might first expand in the meantime. These problems I have discussed here... https://bitsharestalk.org/index.php?topic=11246.msg148712#msg148712
His second problem is that if he buys more BTS to facilitate the trade, his position is now at even more risk, because he does not know whether he can sell the BTS again at a profit or loss when he unwinds his trade. If there were a lending market in BTS, the best implementation for him would be to borrow the BTS, and repay BTS at the end of the trade. Given there is not, it is a risk he may simply find undesirable and cannot manage except by selling or shorting BTS somewhere else, thus negating his initial demand.
Further if the premium is high enough, there is nothing to stop other BTS holders from implementing the trade themselves, apart from a little knowledge. There is no need to force anybody to buy BTS to facilitate the trade.
I'm always open to counterarguments on this, because I might be missing something.
Now in practice, it may be that arbitragers do not think this all through, and are happy to accept the market's pricing of BTS as reasonable without any regard for their own views, especially if it has trended upward. They may consider their risk symmetric around any price the market sets for BTS, and buy it to do the trade anyway. People act irrationally all the time. I can almost guarantee though that the end of such a cycle will be one where demand tapers off, arbs have tons of BTS to sell, and BTS collapses back to a point where people demand BTS on its own merits.
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For anybody interested, I edited the OP to outline why the income potential from arbitrage (when bitAsset demand forces it to a premium) is unlikely to be enough to economically justify an overall increase in the BTS price. That won't stop people from bidding it up anyway during a growth phase, but something other than bitAsset income will later be required to justify those prices.
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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.
Here is another way to look at it:
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.
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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).)
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It is really very simple to see how BitAsset demand drives BTS price:
We have purchased a large amount of BitUSD to give us some price stability for paying developers. If BitAssets did not exist that means we would have had to EXIT our BTS positions via exchanges and created $200K worth of sell pressure. $200K of sell pressure would have dropped the price, but because of our BitAsset demand instead we supported the price while hedging.
So holding BitAssets keeps VALUE in the system rather than causing it to LEAVE the system through the exchanges.
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It is really very simple to see how BitAsset demand drives BTS price:
We have purchased a large amount of BitUSD to give us some price stability for paying developers. If BitAssets did not exist that means we would have had to EXIT our BTS positions via exchanges and created $200K worth of sell pressure. $200K of sell pressure would have dropped the price, but because of our BitAsset demand instead we supported the price while hedging.
So holding BitAssets keeps VALUE in the system rather than causing it to LEAVE the system through the exchanges.
So as a newbie here, im thinking of buying bitassets such as bitusd/bitgold but i'm still trying to get my head around how this works.
It takes roughly 80,000 bitshares to buy an ounce of gold that costs $1,200. I get it that if the prices of gold goes up i made a good buy because it would cost me more shares to buy and if i sell i still get back the equivalent of an oz of gold. So what about the value of the bitshares itself? If the value of the shares goes up but the value of gold stays the same, am i not getting back fewer shares? In that case i would be better off just holding the shares i think and not buying the asset.
Mike
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It is really very simple to see how BitAsset demand drives BTS price:
We have purchased a large amount of BitUSD to give us some price stability for paying developers. If BitAssets did not exist that means we would have had to EXIT our BTS positions via exchanges and created $200K worth of sell pressure. $200K of sell pressure would have dropped the price, but because of our BitAsset demand instead we supported the price while hedging.
So holding BitAssets keeps VALUE in the system rather than causing it to LEAVE the system through the exchanges.
So as a newbie here, im thinking of buying bitassets such as bitusd/bitgold but i'm still trying to get my head around how this works.
It takes roughly 80,000 bitshares to buy an ounce of gold that costs $1,200. I get it that if the prices of gold goes up i made a good buy because it would cost me more shares to buy and if i sell i still get back the equivalent of an oz of gold. So what about the value of the bitshares itself? If the value of the shares goes up but the value of gold stays the same, am i not getting back fewer shares? In that case i would be better off just holding the shares i think and not buying the asset.
Mike
You are correct but definition of "better off" may differ from person to person.
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It is really very simple to see how BitAsset demand drives BTS price:
We have purchased a large amount of BitUSD to give us some price stability for paying developers. If BitAssets did not exist that means we would have had to EXIT our BTS positions via exchanges and created $200K worth of sell pressure. $200K of sell pressure would have dropped the price, but because of our BitAsset demand instead we supported the price while hedging.
So holding BitAssets keeps VALUE in the system rather than causing it to LEAVE the system through the exchanges.
So as a newbie here, im thinking of buying bitassets such as bitusd/bitgold but i'm still trying to get my head around how this works.
It takes roughly 80,000 bitshares to buy an ounce of gold that costs $1,200. I get it that if the prices of gold goes up i made a good buy because it would cost me more shares to buy and if i sell i still get back the equivalent of an oz of gold. So what about the value of the bitshares itself? If the value of the shares goes up but the value of gold stays the same, am i not getting back fewer shares? In that case i would be better off just holding the shares i think and not buying the asset.
Mike
Yes, you are right. If the price of BTS goes up while the price of gold stays the same, you would get less BTS back than you paid when you sell your bitGOLD.
But you do get yield while you are holding the bitGOLD.
And if the price of gold goes up and BTS stays the same, you could presumably get back more BTS when you go to sell your bitGOLD.