Well I’ll be damned: BTSX BitAsset market failure after only 5 days

High Finance. Brought to you by BitShares

What if we were to scrap it all and start over?

What would a new financial world look like?

A world where we could protect what’s valuable without needing to trust anyone.

A world that will never need bailouts.

A world where your financial life is absolutely private. Where your funds can never be seized or your account closed.

A world not limited by borders, business hours, or location. What would be possible if we could create this kind of world?

Welcome to the new financial world of BitSharesX. BitSharesX is the world’s first virtual vault. This is a vault where only you have the key. BitSharesX allows you to buy, sell and trade all kinds of virtual assets that track the value of real world items like dollars, gold, silver and even shares of companies.


Then reality strikes.

Screen Shot 2014-08-28 at 18.28.16
1 marmot > 0.86 BitMarmot

Could it be that a blockchain has failed to overturn the laws of economics? Shock, horror:

Screen Shot 2014-08-29 at 01.43.40
Nothing to see here

…because price-fixing solves everything. The only reason this is now happening, mind you, is that

  • BitShares Bank isn’t a bank, and
  • bitUSD are just BTSX derivative contracts which can only assuredly maintain the peg as long as the price of BTSX forever rises,
  • such that the market appears to think a BitAsset isn’t worth the bits on the decentralised database they’re written on. 

Time will tell whether everything rapidly winds up pear-shaped or whether the agony will be prolonged and drawn-out. When it happens, though, I’d ask you to remember one thing –  you heard it here first. EDIT, 5PM BST: that didn’t take long. The struggle to find answers in the face of contrary evidence begins:

1) BitUSD vs USD will work with no market restrictions provided it is a mature market with a proven track record. 2) BitUSD vs USD will not track well in an immature market because BitUSD-deniers will not buy BitUSD and neither will believers. Right now it trades at a discount. 3) While it is perfectly reasonable for BitUSD to trade at a discount to attract new buyers, it confirms the suspicions of the deniers and thus could potentially end up changing the market consensus that BitUSD will go to 0. BitUSD only works so long as the majority of the market expects it to work and that “faith” can be hard to establish early on without a large market maker willing to back it.

So there can be no skeptics of BTSX economics, only “deniers” of BTSX prosperity gospel. Huge red flag. As we move on, let us recall that BitUSD are only worth their BTSX collateral on settlement, and little else. The post continues:

There is a HUGE demand to short USD and right now that demand shows up as BitUSD being massively undervalued. I think this demand to short needs to be done via option contracts. Someone can therefore set a price on the option contract and this price will absorb the short demand without breaking the peg.

This doesn’t make sense. If BitUSD is ‘undervalued’ vs USD and the market has locked up, it means bitUSD holders are running for the doors – and even at significant “discounts” from par, cannot shift their holdings. Be of no doubt these circumstances are related to BTSX’s fall in price over the last 48 hours.

Suppose I think XTS is going to rise by 50% in the next month. I want an option to buy it at todays prices, so I have to find someone willing to sell me the option to buy it at todays prices within the next month. These options will be purchased by the people who currently wanting to short who otherwise would not be able to.

Suppose I don’t, which would appear to be in line with market sentiment. Piling on collateralised BTSX derivatives (the options) that relate to other collateralised BTSX derivatives (BitAssets) doesn’t change the fundamental circularity of the system which has driven what represents, after one week in operations, a catastrophic market failure: everyone is in fact still betting on the price of BTSX. In a falling market, nobody is going to want to spend real money to purchase BTSX collateral to get exposure to the market – sensible players will simply stay away.  Solution? Suspend trading (…though, query how ‘decentralised’ this system really is if the devs can unilaterally intervene to halt its operation):

The face of market failure
The face of market failure

“We just identified a potential bug and thought it would be better to halt trading than allow the market to do bad things.”

Sorry, bud, but price discovery’s a feature of markets, not a bug.

Anyway. How’s the “bug fix” being effected, pray tell?

When one person can shut down a market...
When one person can shut down a market…

But, for some, a grim realisation begins to dawn:

Mo problems
Mo problems

Everything mentioned above sort of proves the point I made ten days ago. If BTSX prices aren’t rising, or rather if the market doesn’t think its price will rise, BitAssets don’t work.

Enough of that for now – time to kick off the weekend.