Challenge: Does bitUSD market cap growth force BTS market cap to grow? Or NOT?

[arhag]

Everyone being confused about this reminds me of...

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.

[Ander]

Everyone being confused about this reminds me of...

[Empirical1.1]

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.

[starspirit]

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.

[zerosum]

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? 

[starspirit]

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.

[Empirical1.1]

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.

[monsterer]

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?

[Empirical1.1]

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.

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.

[xeroc]

depends on the definition: "coins in circulation"

[monsterer]

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.

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?

[Empirical1.1]

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.

[monsterer]

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?

[bytemaster]

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.

 

[matt608]

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.