The Dao Street Journal: Bitshares and BitUSD
BitUSD: 
Why does the bitUSD margin call persist? As the bitUSD market continues to experience an open large bid for bitUSD (7 million +) the price continues to drift north of its nominal peg to one USD. Since we can empirically observe this strong demand for bitUSD we can ask why is there not an equivalent 7 million bitUSD on the sell side if every one of those units sold can be in excess of the pegged value?
The answer lies in incentives for market participants. The chronic margin call is signaling to the market that the cost or risk of selling bitUSD is too high. The general solution should include lowering this cost of trading. There are two basic ways to subsidize bitUSD shorts at the moment.
[Note these comments are intended to open up a larger dialogue about the effects of any modification. Markets are highly complex social organizations because they are made up of people - who's behavior is largely unpredictable].
- Adjusting margin ratios. At the moment it requires 1.75+ USD worth of bts to create one bitUSD. Since investors face opportunity costs, this cost of capital is high. Lowering the ratio to 1.7 or lower wouldin theory allow more bitUSD to enter circulation which can then be sold to meet bidding demand for bitUSD. Of course this carries the embeded risk of encouraging less collateralized positions and more future margin calls. That may be a factor. But the net result is unclear.
- Second, a direct subsidy could be offered to the stakeholders who hold net short positions in bitUSD or any smart coin in margin call. This method is promising for its simplicity however the issue of where the funds would come from is up for debate.
What do you think about the persistent margin call in bitUSD? I would love to hear your thoughts on whether either or neither of these actions would help encourage equilibrium in the bitUSd markets.
There are so many levels to what is going on. Allow me to suggest a few things to ponder. If you are a whale, you are smart. There are games played amoung the whales. A whale in a swimming pool is going to make waves. It is almost impossible for a whale to buy -in normal market conditions- without moving moving the market. When there is a margin call situation a whale can buy to his hearts content. People run multiple accounts. If you are a whale you are smart and you run multiple accounts. If you move money between accounts you can cause or end margin call situations on yourself. Now imagine a uptrend and a downtrend. Lets say from 13 to 26 then to 13. If you go to a 2 to 1 collateral ratio at the bottom you get 50% more BTS, but you know when a margin call hits it is will cost you 10%. 50 minus 10 is 40. you know you will still be up 40%. The margin call is a just a cost of doing business. You decide to not care. OK Now when it goes up it comes down. At what point during this cycle do you want to buy and sell, and how much? Well if you can buy USD at the top, you can use them to buy BTS at the bottom. How can you buy USD, by being margin-called. Now lets also assume you have multiple accounts. You could cause the market to move up or down at will via a second account. Remember you are so big, everything effects the market. When a margin call happens you start liquidating your positions to get dollars, but you liquidate more than is needed to get extra dollars to buy low. You hide these assets in various other account for later use. You know there are going to be other large accounts doing the same thing. You watch each other move like a game of chess. You job in surviving is to be in control, buy from others at low prices and get as much BTS as you can and then ride up the next upswing levered to the gilt. If you manage PR right you can even "be a hero" margining one account before the other accounts, saving others, margin calling yourself, all causing the opponents magins account to sell, pushing them and then watching them fall like dominoes. But you use up the available liquidity early in the cycle while other use it up late in the cycle. i have been pondering movings among the whales and I think I am onto something... What do you think?
Food for thought here. Appreciate the time and thoughts. I agree whales do this. The best part is how it is recorded in an immutable ledger for the community to study. This is a crucial feature for governance and keeping third party service providers honest. A healthy bitUSD market is a public good for all bts stakeholders.
Ultimately the response should be driven by the community. Consensus is critical and many views should be expressed. For the average investor the bottom line is a good experience with the DEX. Smartcoins are a critical part of the platform. BitUSD makes a simple unit of account that can facilitate mainstream adoption. It is worth considering all potential avenues for improving liquidity and usability.
I've been trying to figure out exactly why bit USD isn't always worth $1. For my ignorance, I've stayed away from using leverage. Is there a way to profit from the current price disparity with say 5X BTS reserves?
Yes if one margins bts into bitUSD at 5x that is a relatively very safe position. The profit will come if you believe that bitUSD will soon return to it's nominal peg closer to one USD. By selling the margined bitUSD today and buying back when the price returns to normalcy - that would be one way to play the overvalued bitUSD.
Thanks for putting this in terms I can understand. One of my issues with the BTS DEX is that it is tough to get simple alerts when prices hit defined targets so it is tough for me to always be monitoring the DEX.
FYI, do you have any thoughts on where bitUSD may be headed? Obviously, demand for bitUSD is higher than supply and this causes the price overvaluation but do you see this reversing in the near term future? Or if banks start closing and the US Government starts discounting its debt, would demand increase further? Another issue I have the the DEX is the lack of stops.
It is good you notice that. Bitshares is interesting because the interfaces are designed by private companies. Which platforms do you use when you check the dex? OpenLedger, Crypto-Bridge, GDEX, RuDEX?
Ug, I'm re-reading my poor grammar on the last post. Apologies. Children don't allow me much time for diligence.
I simply use bitshares OG interface. Do you recommend otherwise? I've noted that bridge and open.ledger are all easily accessible by web but haven't considered looking into them. Would love to hear/see a summary of the differences.
this is dangerous, lowering minimum collateral ratio could/should be done when bitUSD grows and is healthy but definitely not as a solution for this "persistent margin call"
so I would create 1000 bitUSD and send them to a different account, do I "hold net short positions in bitUSD"?
Thank you for articulating a position that I am sure many in the community hold.
Good article!
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