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General Discussion / The Argument Against Bitshares
« on: January 20, 2014, 04:16:01 pm »
Someone posted a read on bitcointalka bout the arguement against bitshares-- and how the prediction market outcome is flawed because there is no output of future rewards. Without control of which better (long/short) gets the future rewards the price will move in sideways, unanalogus to the actual price of the asset. They also cite the paper of Market for Lemons, where because information is assymetrical, the sellers will always have an advantage, since they are more informed than the buyers. This will cause an obstruction in price pegging to the real asset (Bitgold to GLD). Take a read. What do you think. I'm trying to wrap my head around this. Its a sound arguement again bitshares.
https://bitcointalk.org/index.php?topic=423000.new#new
BitShares is not a prediction market, nor could it support one, as it has numerous practical and theoretical problems.
BitShares is a possible future cryptocurrency which allows users to create collateralized debt- instruments called BitAssets. These BitAssets are automatically re-priced (and even liquidated via margin call) based on their mark-to-market value, as determined solely by the price implied by the most-recent BitAsset-creation. The author claims that arbitrageurs will take advantage of differences between the BitPrice and the True Price and therefore price the asset correctly, and supports this claim by arguing that users are trading in a prediction market, and prediction markets are accurate sources of prices.
The claim that users are trading in a prediction market is false, as is the claim that there are ‘arbitrageurs’ at all. In an ‘index prediction market’, shares are repurchased at the price of an index, for example one share of “Hillary2016ElectoralCollege” may be ultimately repurchased for $255/share, if Hillary Clinton managed 255 Electoral College votes in the 2016 election. The magic of prediction markets is that the Future Payout = Future Repurchase – Today’s Market Price, meaning that traders who perceive a positive expected future payout (ie an incorrect price) can profit by trading on and revealing that information (changing the price). In contrast, on November 9th, 2016, after the votes are counted, the world of BitShares will experience no change in state, no payout at all (!) and the “Hillary2016ElectoralCollege” shares will lack even speculative value. They may go up, down, or sideways without bound.
In fact, although the author claims to be a “self-taught Austrian Economist”, the entire microeconomic foundation of BitShares is incorrect. Fundamentally, BitShares assumes that prices are driven by arbitrageurs, when in fact they are driven by users. Arbitrageurs merely perform the simple service of aggregating and cancelling different price offerings, which prevents users from being ripped off. Speculators absorb and transfer risk, brokers call in the order, and janitors cleans the trading floor to prevent slippage. It is not the employees, but the users, who set prices by expressing supply and demand preferences (While short episodes of speculator-control exist, they are defined by their terminal insanity and a subsequent correction to the user-controlled price level). If the market offers a price which is “too low”, such as a car for $5, people will
buy them to use: to drive, to enjoy the latest car tech, to avoid breakdowns, for their children, or simply because $5 is less than gasoline or oil changes. The homeless could even live in a $5 car. If the market set the price of cars to $5,000,000, people would sell them to use that money to buy other things to use. In BitShares, there is no use, only speculation, and so prices can move without bound.
Even if the BitShares idea were partially valid, the scourge of risk, and well-known effects of Asymmetric Information would iteratively drag the price of all BitAssets to zero, in a phenomenon called ‘The Market for Lemons’. The margin call system only increases the fragility of this mysterious experiment, such that the richest or craziest agents could create and profit from immensely volatile price swings.
https://bitcointalk.org/index.php?topic=423000.new#new
BitShares is not a prediction market, nor could it support one, as it has numerous practical and theoretical problems.
BitShares is a possible future cryptocurrency which allows users to create collateralized debt- instruments called BitAssets. These BitAssets are automatically re-priced (and even liquidated via margin call) based on their mark-to-market value, as determined solely by the price implied by the most-recent BitAsset-creation. The author claims that arbitrageurs will take advantage of differences between the BitPrice and the True Price and therefore price the asset correctly, and supports this claim by arguing that users are trading in a prediction market, and prediction markets are accurate sources of prices.
The claim that users are trading in a prediction market is false, as is the claim that there are ‘arbitrageurs’ at all. In an ‘index prediction market’, shares are repurchased at the price of an index, for example one share of “Hillary2016ElectoralCollege” may be ultimately repurchased for $255/share, if Hillary Clinton managed 255 Electoral College votes in the 2016 election. The magic of prediction markets is that the Future Payout = Future Repurchase – Today’s Market Price, meaning that traders who perceive a positive expected future payout (ie an incorrect price) can profit by trading on and revealing that information (changing the price). In contrast, on November 9th, 2016, after the votes are counted, the world of BitShares will experience no change in state, no payout at all (!) and the “Hillary2016ElectoralCollege” shares will lack even speculative value. They may go up, down, or sideways without bound.
In fact, although the author claims to be a “self-taught Austrian Economist”, the entire microeconomic foundation of BitShares is incorrect. Fundamentally, BitShares assumes that prices are driven by arbitrageurs, when in fact they are driven by users. Arbitrageurs merely perform the simple service of aggregating and cancelling different price offerings, which prevents users from being ripped off. Speculators absorb and transfer risk, brokers call in the order, and janitors cleans the trading floor to prevent slippage. It is not the employees, but the users, who set prices by expressing supply and demand preferences (While short episodes of speculator-control exist, they are defined by their terminal insanity and a subsequent correction to the user-controlled price level). If the market offers a price which is “too low”, such as a car for $5, people will
buy them to use: to drive, to enjoy the latest car tech, to avoid breakdowns, for their children, or simply because $5 is less than gasoline or oil changes. The homeless could even live in a $5 car. If the market set the price of cars to $5,000,000, people would sell them to use that money to buy other things to use. In BitShares, there is no use, only speculation, and so prices can move without bound.
Even if the BitShares idea were partially valid, the scourge of risk, and well-known effects of Asymmetric Information would iteratively drag the price of all BitAssets to zero, in a phenomenon called ‘The Market for Lemons’. The margin call system only increases the fragility of this mysterious experiment, such that the richest or craziest agents could create and profit from immensely volatile price swings.
