Borrow HERO and Short it

in bitshares •  5 months ago

Introduction

I've been experimenting with collateralizing Bitshares (BTS) and creating HERO. The mechanics are easy, but like anything else, it's important to understand why you'd want to do it in the first place. While I'm sure people have various motives, mine is one of profit. To be clear, I'm not trying to make a lot of money in the process, at least not right now. It's more of an experiment to understand how to make money during all phases of the market.

Setting the Stage

It's easy to make money during a bull market right? You invest in something that you expect to go up. Let's say Bitshares (BTS) for the point of this article. If I buy 3000 BTS at 20 cents and it rises to 30 cents, I made $300 ($900 - $600). But what if BTS decreases? The typical knee-jerk reaction is to sell your shares. While that is certainly an option, it's a drastic move if you hold a fundamental belief that BTS is good and that it will thrive in the future. The odds of you selling at the top of the bull run and buying back in at the bottom of the bear run are horrible. Human nature has a way of making impulse decisions that follow a herd mentality. Guess what happens to you when you are stuck in the herd. Absolutely nothing in some cases, and often you end up buying at the high points and selling at the lows.

Stay in the Game

But how do you stay in the game when things are working against your original assumptions? That's what this article will cover, in detail. I'll provide a real-world example with screenshots and do my best to explain where the profit lies so you can try it for yourself. Don't feel bad if you have to re-read it a few times. It's take me a bit to wrap my mind around it as well.

Collateral

This word is so simple but can be so cryptic. Collateral is anything of value that you own that is pledged to someone other than yourself in exchange for some form of value. if your house is worth $200,000 and you need money, most banks will hold the deed to your house and hand over cash, say $20,000 that you can use however you see fit. You still owe the bank $20,000 and if you fail to pay it, they can take your house from you, sell it for $200,000 and give you $180,000 thereby forcing you to pay back the $20k loan. So, for the rest of this discussion, BTS = COLLATERAL. Got it?

No Banks

Awesome, no banks. But.... We have a blockchain. And it has rules. One of the amazing rules @dantheman built into it is the idea of setting aside BTS as collateral in exchange for certain other forms of value. We will get into the mechanics shortly, but I want to marry the terms in Bitshares to the House example above. Your BTS is the same thing as your home and to keep it simple, we are going to pretend that your home is paid off just like your BTS is "paid off", meaning that you own it free and clear.

HERO

The Hero is an asset on the Bitshares Dex. It was created with the mission of being a value that tracks what a dollar would be worth if there had not been any monetary inflation since 1913. So, if you owned a dollar in 1913, it would have much higher purchasing power today. You've heard this many times in stories where your parent bought a house for $25,000 in 1970. Homes were less expensive because money was actually worth more. You could buy a nicer home with less money. Governments print money for various reasons and when they do, it increases the supply of that money. If money is printed faster than demand keeps up, it gets devalued. NEWS FLASH: Printing money will continue. It's a drug for the fiat world.

The HERO takes us to a somewhat magical place where the printing presses stopped in 1913 and we can now see what that dollar will buy us today. It's around $160 and the formula used will keep it on a steady ~5% rise. You must trust the peg on this in order to follow the rest of the discussion. I'll try my best to explain why the peg will work later, but for now all I can say is that it works because there is real skin in the game. People buying and selling the HERO are both operating under the same set of assumptions. When this happens, a market can be made.

The Good Stuff

I think we have enough background to dive in. I'm going to buy 3000 BTS. You can use any amount you like, even 300 BTS. Remember, in this world we can buy fractions of everything too so you can learn with much smaller values. I think 3000 BTS, which represents around $1000 USD is a reasonable amount of money to demonstrate and drive home the concept.

Setup an account at Openledger

Openledger

Purchase Bitshares

You can transfer BTC from any account you may have elsewhere into the Openledger wallet under the Deposit/Withdraw menu

Navigate to the HERO / BTS Market

HERO/BTS

Screen Shot 2017-06-15 at 5.34.01 PM.png

Here, you can see the market representing trades between BTS and HERO. You could easily trade BTS for HERO right? The scenario is that you bought BTS and rode it up, but now BTS is in a downtrend and you are beginning to fidget. "I don't want to lose value." "Will it keep going down?" "I believe in BTS long term and don't want to miss the boat if there is a sudden reversal."

Believe me, those questions go through all our heads and this strategy will allow you (a) keep all your BTS (b) benefit from the reduced price once the market reverses.

Borrow HERO

Here is where most guides glaze over the mechanics. Not gonna do it.... This is where you have the opportunity to gain a real understanding. Remember the house (BTS). Remember the cash you borrowed from the house (HERO). We are going to borrow some HERO by putting our BTS up as collateral! I'll get to the question of why we want to borrow HERO later. For now, let's just say we have an opportunity and need HERO to take advantage of it.

  1. Click borrow bitHERO / HERO
  2. Type in the value 1 into the DEBT field
  3. Set the slider to the highest collateral ratio allowed (I like to set it to 5:1 but 4:1 is probably safe in a non-volatile market as well) I will discuss this later as well
  4. The form will show how much BTS will be locked up (collateralized). That BTS qty is your house. That represents the 200,000 house and you just borrowed on 1/5th of it's value by setting your collateral to 5:1.
  5. Lastly, click Update Position That inks the deal.

Screen Shot 2017-06-15 at 5.01.00 PM.png

If you choose to do nothing else, you can exit the position by clicking the borrow link again and typing a 0 into the field. Since you still have 1 HERO in your possession, it'll just close it out and you will be right back where you were before. Cool.

You pay no interest from borrowing off your own collateral. There is only a very small fee for the operation.

Sell HERO

This is where my mind explodes. Or at least it used to. All of a sudden I have this HERO in my possession. I created it out of thin air. Not really... I borrowed it by pledging BTS, BTS that I can't get back unless I pay back the HERO. So, I've got skin in the game. This is why it works, because everyone has skin in the game.

But how is selling a HERO going to help me? I mean, I'll sell it to someone and then what?

I love analogies and I'm about to drop another one on you to illustrate this concept. Let's say you own a computer and you sell it to Joe for $1000. But two weeks later, Joe is finacially strapped and wants to sell it back to you for $600. You'd gladly take that deal right? I mean, the end result is that you'd have the computer back and $400 in your pocket. You are clearly better off than you were before. If you sold the computer at a later date at market value, you'd have your $1000 plus the $400. Score!

This is what we are doing with HERO. We are going to sell our HERO at market rate and then buy it back when BTS goes back up in value. There is one glowing assumption here and it's that you ultimately believe in the long term potential of BTS. If you don't believe in BTS, then your choice is really easy. Just stop reading this article and sell your BTS. Otherwise, continue reading.

Since you are still in the market view, you can see a red line on the chart. This line represents the calculated value of what a HERO is actually worth relative to BTS. It's also listed above under the Settlement box.

Screen Shot 2017-06-15 at 5.18.02 PM.png

Looks like it's $511 BTS. This is the price you will sell your HERO for, so do it!

Screen Shot 2017-06-15 at 5.20.26 PM.png

You'll show an open order now until someone buys it

Screen Shot 2017-06-15 at 5.21.17 PM.png

Once it's sold, I like to place an order to repurchase it while I'm thinking about it. Just like you bought your computer back for less than you sold it for, it's important to put in a buy order for a lower price. I've chosen to buy it back for 350 BTS. I don't know exactly what day that will happen on, but when it does, the order will execute all by itself.

The end result after you buy it back will be just like the computer analogy. You will have 1 HERO plus 161 BTS (511 - 350). So, you made 161 BTS. Once that cycle is complete, you can either pay back the loan by clicking on borrow bitHero and setting the value to 0 or you can repeat the cycle assuming your faith in BTS is strong. Another awesome part of this strategy is that you never sold your underlying BTS. You were able to make 161 BTS leveraging your existing BTS.

I like to treat this as a downward price strategy and limit my exposure by setting limits. Borrow and sell HERO on BTS price dips. Buy the HERO back when the BTS price recovers and payback the loan. Repeat.

Sometimes your sale might not go through at the Settlement price. You might need to entice users by offering slightly below the Settlement price. Maybe 505 or 500. This may result in 5-10 BTS of sacrificed profits, but you'll never even have the opportunity to profit if you don't find someone to buy it.

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You are welcome.

Very interesting article.

A sidenote though that I thought of for anyone who knows:
Is the internal market of Steemit actually Bitshares or is it entirely independent? If it's nothing to do with bitshares, what is reasoning behind making it that way?

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They are independent. The Steemit blockchain required modification to support the content related features required.

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Ok. So the site couldn't use Bitshares then for some reason. I guess it could be hard to implement, considering how technical Bitshares is.

Great post @billbutler, this is exactly why @stan and I created the HERO concept. To allow people a different choice to hold their savings in. To give people a choice in smart money and money backed by something vs debt.

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Agreed! Thanks for the kind words.

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such an interesting idea and very different from most of the coins you see.

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We have been discussing this for OVER a year..

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I just did this and now I finally get what you are trying to do with Hero. It's a pretty amazing concept.

very interesting post. I think I need to read through it again to wrap my brain around this.

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Do it!

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I finally got up the nerve to try your shorting technique. I hope you don't mind I included you in my post about my first attempt to borrow and short Hero. This was so cool! I did a small amount, but it was still exciting for me. Thanks again for the instruction.... hope to see more like this.

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Understood. It's not a technique for everyone. It's one that can be used where you can risk a relatively small amount of capital relative to your overall holdings.

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Yep, I'm in the same boat. For reasons I'm uncertain of (I blame it on decades of financial indoctrination by the oligarchs that seems to have implanted a subconscious resistance to such knowledge), the concept Bill perfectly described here just doesn't sink in as deep, intuitive knowledge. I don't see how it could possibly be explained any better though. I just need to meditate on it and put it into practice and through repetition "pound" it into my psyche -- so as to "indoctrinate" myself.

It's very important to emphasize -- again -- that the strategy described here is based on the belief that in the long run the value of BTS will increase. I am also certain there are complementary strategies one can employ to profit when the value of BTS is declining. I don't know the mechanics of that either, and of course the two methods can't be used simultaneously as their premises fundamentally conflict. Timing is everything, but rather than trying to guess the market and switch between those strategies I think it's best to look at the fundamentals of why BTS provides value and pick the strategy that best fits your assessment of that in the long run.

Fundamentals can be enhanced or negated by marketing however, which complicates choosing the correct strategy to employ. BitShares hasn't had much good marketing for a long time, but that is now changing and only serves to improve my optimism for the future of BTS. I'm a terrible chart reader and short term speculator so the strategy Bill described so well is my perfect HERO.

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This is a strategy that works well on BTS dips. It also works when BTS is in a bull market, but probably best to execute this strategy at the beginning of a bull market, not after it's been running for a bit.

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Although it is explained well I think I need someone to make a chart to visualize how this works. I do understand how to make a profit when BTS is declining in value. Buy, not borrow, a Hero. The Hero price is relatively stable and as BTS decreases in value you will get more BTS back when you sell. It takes more BTS to buy a Hero. If you watch for the Call Margin price and sell when it shows up in the order book you can make a tidy profit.

Thank you so much! This really helped me wrap my mind around borrowing Hero. After watching Stan's talk on vimeo, I heard him mention it but like you said, it can take a few times for this to sink in. I'm new here but am really excited about the long term vision of BTS so this is fascinating. Thanks again, following you now!

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Excellent!

Gosh, I wish I had written this...

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Well, you kinda did. I learned it from you and your son. I had the opportunity to meet him in NYC at the block.one party. It was a great evening.

Thank you very much @billbutler for sharing the knowledge, I will definitely pay it forward as soon as I understand it a little bit better. I must say I'm loving this community, thanks to people like you.

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Appreciate it.

Didn't realise you could short crypto... very very interesting post. Resteemed it.

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Coming from @thecynic, that's impressive!

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My name isn't all it seems, just cynical in respect to this damn economic system, fractional reserve banking and excessive taxation...

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Here here! I second that sentiment.

I was looking for more information about HERO and I am glad I found your post, very helpful. Thanks!

Thanks, Bill!
Still new to this... What is the major difference or incentive to borrowing against the HERO vs the BitUSD? Wouldn't the HERO keep going up if it is at ~5% each year? It seems that its value would go up as the dollar currently goes down but I am sure I am missing something. 🤔

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Good question. I like the Hero because more conservative investors have an incentive to earn interest, much like a bond. It attracts a completey different market.

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That is it exactly. The HERO will gain 5% year on year while the dollar historically lose 5%. BitUSD trades at dollar face value give or take 1% so it will lose its value over time.

HEROS are designed as a stable, non volatile smartcoin targeting retirement funds etc.. who are risk adverse.

Thanks for the step by step. I am thinking about borrowing some HERO.

Thank you so much for this article, it made everything so much clearer for me. This article is also gonna be a tool for me to explain it to others. I was wondering can you please create an article or perhaps answer my reply with regards to margin calls? I still don't understand the way margin calling works with bitassets.

Like if I borrowed and sold 1 Hero at 1000 bts/hero at 3x collateral. Then let's say BTS went up and lowered the price to 500 bts/hero. Let's say I did not decide to sell at that point, however the next few weeks BTS went down and HERO price went up to let's say 750 bts/hero. I want to buy back but there were no takers at 750, the next one is around 1000. My question is, what would happen if I strategize to decrease my collateral to a point where I can get margin called at 750, perhaps at 1.5x. My thinking here is I'd rather get margin called than buyback at a loss if BTS price continues to go down.

My question is how does margin call works in this situation? How much will I lose? If my account gets margin called, am I essentially gonna eliminate my debt at the price point of 750bts/hero? Thereby giving me a 250bts profit still?

What happens when an debt gets margin called? I really don't get it still. Can you please explain it in an analogy that a 5 year old can understand?

Thank you in advance.

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If you believe that BTS will come back, simply increase your collateral ratio as the price of BTS falls. There's no reason to allow a margin call. It's the same as selling low, and that's a bad strategy. Decide on your strategy first. You either believe in BTS long term or you don't. You could consider borrowing another HERO if the price drops down again. This would allow you to sell a second HERO at an even higher value. Then place a buy order for that second hero at the same value as your first trade.

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wow, this is a nice strategy. Thank you so much for this advise :)

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So I'm not getting this at all yet. Let's say I borrow a Hero at 1000 BTS and sell it. If the value of BTS increases to the point that it only takes 500 BTS to buy the Hero back haven't I lost 500 BTS? What am I missing here? Help me wrap my head around this. Maybe I need more coffee. lol

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Never mind. I figured it out. Definitely takes a few read throughs and just trying it out with a low amount.

One week ago I exchanged my 15 € worth of ETH won by sleeping with fan noises against a few bitshares. Few days ago, someone(peoples?) placed buy orders on different bitshare markets at almost twice the bocktrades bridge price, ensued 180bpm heartbeat and 2500 € profit, now I'm shorting HEROs thanks to this post. (one month ago I knew very little about exchanges)
Livin' the ciphernetican dream xD

This is awesome Bill. I just got recommended to read this. :)

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Glad it helped.

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I managed to short two hero's. But now I am a bit stuck as I am not sure now how to sell.

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Re-read carefully. Read the computer analogy. You just said, "I'm not sure how to sell". When you short an asset, you are selling it high and buying it low. You already sold your HERO at a high price and now you must wait for BTS to appreciate in value, which has the intended effect of decreasing the value of the HERO. After this happens to a degree that is acceptable to you (your desired profit), you will be able to buy back your hero at a value less than you originally sold it for. Read through my example until it sticks. Get a whiteboard and draw pictures to help you frame it in your mind.

This is the best explanation of this I have seen so far!

Very informative piece about things I know nothing about. I feel kind of old fashioned buying low and selling high...

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Buying low and selling high will never go out of fashion ;)

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yeah, it's a bit strange wrapping one's mind around it.

Great article. I have upvoted this and plan to go over the details more. Thank you for sharing this with us.

I'll try it. And than will write what happens )

This post received a 46% upvote from @randowhale thanks to @billbutler! For more information, click here!

Interesting

Very informative post - thank you!

Thank you for this article. I'll have to re-read it again to make sure I understand completely.

Thank you for posting @billbutler.

Appreciate the explanation very much.

Can you do it with other coins like ETH or bitcoin?

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The only thing you can borrow is bitUSD and HERO, I think.

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Will there be coin additions in the future?

very interesting method. I'm trying to learn!

Great post! I'm going to read it Until I get it

Hi after reading this please let me know if I am correct I think this is it below and if I am correct wa wa weee wa vedy niiiiiiiiiiiiiiiiiiiice I liiiiiiiiiiiike
I have xyz amount of bitshares I borrow for example 1 hero
and when the price of bitshares goes up the hero goes down
and in essence I am still long bitshares as it is locked up and since I believe in bitshares as a long term long position as bitshares goes up the hero goes down and I cover the hero at a lower price whenever I want and it is smart to keep doing this process over and over as settling the hero as the price of hero goes down bec then my bitshares position in total amount of bitshares goes up and if I do this many times in a row as bitshares price rises and I keep borrowing hero and bitshares price goes up and I keep settling hero and I keep doing rinse and repeat so the outcome total of my total bitshares in account will keep going up as I rinse and repeat so basically more and more bitshares will = more and more $$$$$$$$$$$$$$ because my margin power will keep going up as I keep rinse and repeating boooooooooooooooooom please all let me know your thoughts as I think I am correct and if I am not correct feel free to let me know and on a side note this is my first post I plan to learn this whole steem system and I will try and post only good things starting hopefully in afew days soo if you are all about a cause as I am you can follow me if you would like as I currently have zero followers I would like to be there for your causes and we can all be there for each others causes :) because why not? and if not now then when?

I don't see bts/hero exchange anywhere... Also I've never seen an option to borrow on bitshres2.0 or openledger.... I must be doing something wrong...

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Nevermind I see the option to borrow bitUSD (The button is very small.)

Is there anything about borrowing HERO that is better than buying HERO when BTS is high and selling HERO when BTS is low? Or is your strategy just for if you think BTS will go down and you don't already own any HERO to sell? (Or any other market pegged assets)

After reading again @billbutler is there a way to short etherium via HERO or any other possibility? Would like to mitigate my risk if the price collapses.

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Not that I am aware of.