Author Topic: [Documents] Whitepapers & Broschures  (Read 24704 times)

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Offline jsidhu

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A question:  How do money market funds that are pegged to a price of $1.00 work? 

I remember back in the 2008 crash, there was a big deal made out of the possibility of 'breaking the buck', and having these funds be worth less than a dollar.  I think a few of them briefly traded under $1.00.


Is bitUSD similar to these at all?

I don't know any of these... not sure any link?
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Offline Ander

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A question:  How do money market funds that are pegged to a price of $1.00 work? 

I remember back in the 2008 crash, there was a big deal made out of the possibility of 'breaking the buck', and having these funds be worth less than a dollar.  I think a few of them briefly traded under $1.00.


Is bitUSD similar to these at all?
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Offline starspirit

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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.

Offline starspirit

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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?

I think the underwriter has to ensure the underlying stock is available if you choose to exercise the option to buy the stock... if you are well in the money this makes sense. Thus I think the underwriter will hedge their risk by buying the stock at the time the option is purchased.. and then it is in their best interest to ensure the options are out of money so if they are a big enough whale.. well incentive to manipulate is there....the sheep are always slaughtered
That's close, but usually the underwriter only needs to buy a fractional amount of the stock, depending on how far in- or out-of-the-money the option is (or the probability they need to deliver). As this probability changes, they adjust their position - selling whenever the price (and probability) falls, and buying whenever the price (and probability) rises. This is known as "delta-hedging" because they only hedge the delta, or equivalent fractional exposure, of the option at any time. Buying high and selling low costs them money over time, the expectation of which they build into the initial option premium with a profit margin. As long as they forecast the volatility reasonably, they collect the profit margin, there is no need for them to manipulate prices for a better outcome.

Offline jsidhu

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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?

I think the underwriter has to ensure the underlying stock is available if you choose to exercise the option to buy the stock... if you are well in the money this makes sense. Thus I think the underwriter will hedge their risk by buying the stock at the time the option is purchased.. and then it is in their best interest to ensure the options are out of money so if they are a big enough whale.. well incentive to manipulate is there....the sheep are always slaughtered
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Offline Ander

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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?
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Offline starspirit

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Now I am honor-bound to come back to you all!  I trust you are patient... :D

Offline arhag

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tonyk, after much consideration, I'm even more confident now that this prevailing notion of the BTS price being directionally tied in some way to bitAsset supply growth is logically flawed. For punishment I may dig myself in even deeper and summarise my current logic on this.

Please do. I think this is worth discussing more.

The two questions you and I have disagreements on (and I am by no means confident about my current position, but have still not been convinced by your arguments to take the opposite position) are:
  • Does increasing outside demand for BitAssets (meaning purchasing BitAssets using fiat) lead to a net increase in the price of BTS (after arbitrage takes place) assuming that every market participant's view on the fundamentals of BTS has not changed? My view is that it does as long as there is latent shorting demand that cannot be matched because of the price feed restriction. The arbitrage process causes upward price pressure on BTS as the arbitrageurs buy it with fiat to later buy the price-pegged BitAsset on the decentralized exchange (or to replace the BTS they spent to buy the BitAssets to maintain their overall exposure to BTS); it also causes the premium on the BitAssets to return to the peg as they sell off the newly acquired BitAssets in the BitAsset/fiat market at a tiny profit above the peg; but it does not cause a decrease in the price of BTS relative to the BitAsset due to the arbitrageurs purchasing the BitAsset with BTS because there is a large wall of shorts at the price feed. Since the shorts are matched with the arbitrageurs' BTS, BitAsset supply increases (a consequence of this process, but not itself the cause of BTS price growth). The BTS price grows because the arbitrageur bid up the price buying the BTS on the outside exchanges but did not bid it down when selling it for BitAssets at the price feed because of the wall of shorts. Since the BTS price in outside exchanges grows from this process, this is eventually reflected in the price feeds of the decentralized exchange. Now the same BTS superbulls can rollover their short positions into new ones but because the price feed is lower, they can support a larger supply of BitAssets without having to increase their exposure to BTS (even if they sell off the BTS profits they made from the short for fiat in order to maintain the same amount of BTS, that is still a smaller quantity of BTS sold for fiat than the corresponding quantity of BTS purchased with fiat in order to start the arbitrage process, and thus the net effect is still upward price pressure on BTS). And that process of rolling over to lower price feeds is the reason why a large short wall can be maintained at the price feed even as it is chipped away through these types of arbitrage processes and even if the number of superbulls (and the amount of BTS they own) has not increased.
  • Does the DAC need to earn any profit that it distributes to BTS holders in order for BTS to have enough value to support an arbitrary supply of BitAssets? I think the answer to this is no, because BTS can behave like a currency as well as a stock. A currency has no intrinsic value other than acting as a mechanism to facilitate trade. It doesn't earn the holder a return and in fact has negative return because of inflation. And yet the value of the total supply of currencies is incredibly large simply because we believe it has value. I think the same holds true with BTS (and BTC and all other cryptoassets for that matter). Once one of these assets gets big enough to have a serious network effect, the value gets some inertia and it isn't easy for that value to just disappear because we all suddenly wake up and decide it is worthless (although that is theoretically possible). So as long as the price of BTS has gradually increased because of the mechanism I described above (buy pressure on the growing BitAsset supply), I think the price of BTS should remain high even if it doesn't earn a return for its holders. It would maintain its value simply because it is the necessary backing store of value for the BitAssets that society would use to facilitate trade (as well as other things like price speculation of commodities), just like fiat maintains its value (ignoring the relatively small effects of inflation) simply because it facilitates trade.

Offline Ander

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@starspirit

It is very interesting that several moths later you still find a lot of merit in your -" Regardless of demand, unchanging price" hypothesis...

I am sure things are and have forever being working like this - "Price is fixed, demand and supply just play/slide around that price"... it is indeed a very screwed up place... and everything is broken... other than the main premise that is.
tonyk, after much consideration, I'm even more confident now that this prevailing notion of the BTS price being directionally tied in some way to bitAsset supply growth is logically flawed. For punishment I may dig myself in even deeper and summarise my current logic on this. Let me just say I think the prevailing view is a very complacent assumption that if not dealt with, will come back to haunt in the end.

Starspirit, I think you are on to something when you described bitassets as a deep in the money option on the price of bitshares.  It would be good if we could, as a group or individually, figure out exactly how bitassets relate to bts, and write a whitepaper on this.
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Offline toast

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@starspirit

It is very interesting that several moths later you still find a lot of merit in your -" Regardless of demand, unchanging price" hypothesis...

I am sure things are and have forever being working like this - "Price is fixed, demand and supply just play/slide around that price"... it is indeed a very screwed up place... and everything is broken... other than the main premise that is.
tonyk, after much consideration, I'm even more confident now that this prevailing notion of the BTS price being directionally tied in some way to bitAsset supply growth is logically flawed. For punishment I may dig myself in even deeper and summarise my current logic on this. Let me just say I think the prevailing view is a very complacent assumption that if not dealt with, will come back to haunt in the end.

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Offline starspirit

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@starspirit

It is very interesting that several moths later you still find a lot of merit in your -" Regardless of demand, unchanging price" hypothesis...

I am sure things are and have forever being working like this - "Price is fixed, demand and supply just play/slide around that price"... it is indeed a very screwed up place... and everything is broken... other than the main premise that is.
tonyk, after much consideration, I'm even more confident now that this prevailing notion of the BTS price being directionally tied in some way to bitAsset supply growth is logically flawed. For punishment I may dig myself in even deeper and summarise my current logic on this. Let me just say I think the prevailing view is a very complacent assumption that if not dealt with, will come back to haunt in the end.

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@starspirit

It is very interesting that several moths later you still find a lot of merit in your -" Regardless of demand, unchanging price" hypothesis...

I am sure things are and have forever being working like this - "Price is fixed, demand and supply just play/slide around that price"... it is indeed a very screwed up place... and everything is broken... other than the main premise that is.

Offline starspirit

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Starspirit, maybe I'm not following what you mean in everything you said, but as far as I can tell, none of the chains of events you envision hurt bitAsset holders other than under-collateralization which is discussed in the paper.
That's cool, just a suggestion. I was just noting that there are situations where manipulators and smart traders can take more than their fair share from the collateral pool at the expense of bitAsset holders.

I admit I never would have anticipated the level of controversy and analysis brought on by this statement:
"Short sellers are typically bullish on the direction of BTS vs. the market pegged asset."

Sorry Agent86, it was my mistake to be overly pedantic on this point. I do a lot of arbitrage, and avoid directional views when I do.

Offline Agent86

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Starspirit, maybe I'm not following what you mean in everything you said, but as far as I can tell, none of the chains of events you envision hurt bitAsset holders other than under-collateralization which is discussed in the paper.


BTW your above explanation for why shortselling isn't bullish makes no sense at all.  You say if someone sells some stake but uses remaining stake to short bitUSD it isn't bullish on the direction of BTS vs the bitassets as I stated in my paper.  But no one would do that unless they thought BTS would go up in value relative to bitUSD so it's still bullish.  This just describes someone who is bullish but also needs money for something else; it also isn't "arbitrage".

My original point was that a trader taking a short position may not be bullishly motivated in taking it, if they are hedging their position as one leg of a trade solely to take advantage of a bitAsset premium. The fact as to whether they hold any stake beforehand is irrelevant to their motivation behind the new trade - they have not adopted a more bullish stance. They are not seeking to increase BTS exposure, or having any net impact on the BTS price. Its further possible they may only own some BTS as inventory for this sole purpose rather than actually having a bullish outlook. I am still agreeing with you that the (naked) short position is a "bullish position" - but that's a quality of the instrument not necessarily the trader. (You're correct its not an arbitrage, but its the least-risk implementation to take advantage of the bitAsset premium).

Having said all that, this particular debate possibly seems out of proportion with your original intent.
I admit I never would have anticipated the level of controversy and analysis brought on by this statement:
"Short sellers are typically bullish on the direction of BTS vs. the market pegged asset."

It still seems innocuous to me and accurate but I can accept that not everyone will be happy with my writing. 

Feel free to rewrite whatever you wish.



I guess my difficulty is I'm not seeing something that falls outside the categories of risk for bitAsset holders that I discussed and I don't want to add too many hypotheticals to the paper that might cause more confusion.  If there is something you think should be added I would just want it to be as short and clearly articulated as possible, keeping in mind it isn't an investment prospectus/ BTS trading guide, it's geared to bitAsset holders.

You might even consider organizing your ideas into a trading guide for BTS/shortselling or a group of recommendations you favor.

Offline starspirit

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Quote
I think you have something backward... if a short seller sells bitUSD at the feed price and buys it above the feed price they have lost money, not made money.
Ops, I confused that...

Quote
If bitUSD is priced above the feed on the internal market, it motivates short sellers to short on the assumption the exchange rate will eventually go back down so they will be able to cover later for less.  But it is not specifically an immediate arbitrage situation in and of itself.
Is that enough to create the necessary BitUSD if there is a big demand for it? Why should the price of bitusd go down? It's not a clear decision for potential shorters to short on that assumption even if the demand for bitusd is big signaled by the high price of bitusd.
No other mechanism is needed to make the bitUSD price go back down simply because (above parity) there's no limit to the supply.
There is a limiting factor on the supply, being the market's appraisal of the value of BTS (BTS market cap). Once nearly all the BTS are in the collateral pool, there is no scope left for traders to create more bitAsset. BTS are traded in a free market, so there is no way to guarantee that the BTS market cap will remain far above 3x bitAssets. In such a situation a bitAsset premium could be sustained indefinitely. There is no mechanism in this situation that can force the bitUSD price down, except possible that potential bitUSD buyers realise that bitUSD is suddenly more risky.
There's no practical limit to the supply of bitAssets in part because there's no specific limit on the marketcap of BTS.  The marketcap of BTS will be driven upward long before "all the BTS are in the collateral pool" and people will cover and re-short to free collateral.


While there's no theoretical limit, practically you can't create any more bitAssets than the BTS market is prepared to back. The market cap of BTS is determined in a free market, based on the market's appraisal of the prospects for future returns on it. Like any other asset market, it is forward-looking not backward-looking. On any day the market can reappraise the value of BTS to be significantly higher, or significantly lower. Therefore whatever people may believe about price pressures from bitAsset demand, any such pressures, even if they exist, become completely irrelevant in the next moment of time when the market is free to reset its trading price for BTS.

So the defining limit on the size of everything is how much value the market is willing to place on BTS. The market cap and growth of bitAssets are certainly factors in this valuation, but they cannot force the BTS market by any means to being valued at more than 3x bitAssets (or any number at all) nor to growing alongside the growth in bitAssets. That's indeed why a black-swan event is possible rather than impossible.

While one might argue that if BTS rises it allows shorts to roll and free collateral for further supply, I could equally argue that BTS declines would lead to shorts losing collateral and reduce further supply. Both these statements are true. Which way it goes will depend on what the market ultimately is willing to price BTS at.


BTW your above explanation for why shortselling isn't bullish makes no sense at all.  You say if someone sells some stake but uses remaining stake to short bitUSD it isn't bullish on the direction of BTS vs the bitassets as I stated in my paper.  But no one would do that unless they thought BTS would go up in value relative to bitUSD so it's still bullish.  This just describes someone who is bullish but also needs money for something else; it also isn't "arbitrage".

My original point was that a trader taking a short position may not be bullishly motivated in taking it, if they are hedging their position as one leg of a trade solely to take advantage of a bitAsset premium. The fact as to whether they hold any stake beforehand is irrelevant to their motivation behind the new trade - they have not adopted a more bullish stance. They are not seeking to increase BTS exposure, or having any net impact on the BTS price. Its further possible they may only own some BTS as inventory for this sole purpose rather than actually having a bullish outlook. I am still agreeing with you that the (naked) short position is a "bullish position" - but that's a quality of the instrument not necessarily the trader. (You're correct its not an arbitrage, but its the least-risk implementation to take advantage of the bitAsset premium).

Having said all that, this particular debate possibly seems out of proportion with your original intent.
« Last Edit: November 30, 2014, 03:30:14 am by starspirit »