ELI5 Detailed Explanation of Everything going on with BTS/bitUSD MarketsteemCreated with Sketch.

in bitshares •  8 months ago

This post is a bounty claim for the post https://steemit.com/bitshares/@billbutler/bounty-for-a-detailed-explanation-of-everything-going-on-with-bts-bitusd-market by @billbutler.

I will be explaining the recent events happening in the leveraged trading world of smart coins (BitAssets) on the bitshares network. I will be using examples that everyone is familiar with to try to achieve the purpose serving as a teaching aid to complement existing financial documentation. For an official link of said documentations, check out https://bitshares.org/technology/price-stable-cryptocurrencies/

My main focus will be the following terms and their related theories (see screenshot for reference):


  1. Settlement
  2. Call Limit
  3. Margin Price
  4. Purpose of the Yellow Shaded Area
  5. Explanation of the yellow colored order on the books (under the price column)
  6. Particular strategies you might employ in this market scenario!

So to understand the current situation, we need a quick analogy of how leveraged trading works.

Imagine you have a house worth about $100,000 USD. You've taken out a loan to pay for it because you have a stable job but did not have the lump sum to pay it off outright. You‘ve currently paid 50% or $50,000 USD of that loan so you have 50k worth of equity in the form of a house as your asset.

Now comes a unexpected medical procedure that you need in order to save your life if you do it within the week. the procedure costs 15k but again you have no cash so you have to decide between dying or selling your house to pay for the costs. the problem with selling the house is that you can't sell it in time so you take a refinance on your mortgage to get the 15k out and put your house as the collateral. since your house is worth 50k in equity under your name, you have put up about 3 times the value of your loan which is required by the bank.

Then the 2008 real estate crash happens overnight and your house is now worth 70K usd and thus your equity is only 35k. that is 10k short of your required 3 times loan's value of 45k. your house is now repossessed and sold cheaply for max speed to repay your debt.

This analogy is pretty much what happened in the last few days in the leverage trading of BTS. I will now explain the key terms mentioned above and tie it to our analogy.

  1. settlement price is the average price of bts traded on all exchanges. you can think of this as the Zillow's price listings of homes.
  2. call limit is the least collateralized loan (one that has the least amount of support/backing). you can think of this loan is the first in line to be defaulted and thus having the house to be repossessed.
  3. margin call price is the price that your collateral will be forced to be sold at. you can think of this as the price your home was auctioned off to the highest bidder at the pawn shop of real estate.
  4. Purpose of the Yellow Shaded Area is to show you the volume (height) of orders that are forced to be sold. normally this is only a thin line that can be distinguished from unforced (orange) sell orders. you can think of this as the countless for sale posts on lawns with the stamp of "repossessed" in red.
  5. Explanation of the yellow colored order on the books (under the price column) is a list of calls to be made in a certain period of time from now. these are initiated from those who loaned out assets and want their money back. you can think of this as the bank is also insolvent and are asking to terminate the loan early. In the BTS network, this will be done 24 hours from the time you initiated a forced settlement.
  6. Particular strategies you might employ in this market scenario is to buy up margin calls or initiate force settlements if you can. the official link from bitshares I posted above has an overview of optimal strategies. you can think of this as warren buffet coming to buy up all the houses for pennies on the dollar and then either waiting or renovating it for a profitable flip later.

TLDR: you definitely should read this and also dig into leverage trading before doing any of it.

I hope you learned something from this post and that it was as much fun for you to read it as it was for me to make up those analogies. see ya around!


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Thanks for this detailed post and the creative analogies. I expect you will be the winner unless a better post comes up. Cheers!


(dance) thanks!

This is awesome. I saw a 11million bitUSD settlement move through the DEX yesterday and was shocked. Would be cool if someone would create a video or overview of when it is a good time to borrow bitUSD, and just let it sit. There is so much fluctuation around BTS, and bitUSD it is very confusing to know good times to borrow bitUSD, or good times to buy stuff with bitUSD and conversely sell.


I think it's pointless to borrow bitUSD and just let it sit. The reason I say this is that I can't think of a good reason to have unused capital lying around. Let's say you borrow 10k bitUSD and post appropriate BTS as collateral for it. If you fail to use all the bitUSD, I think it makes sense to just pay back the loan (or whatever portion of bitUSD you have left over) to minimize your exposure. Bitshares makes it so easy to borrow again that it's silly to expose yourself to unnecessary risk.


The idea it's "pointless" is not quite accurate Bill. Yes, your point is quite valid if you're borrowing BitUSD, but what if you just buy it rather than borrow it? Do you not see the value of savings in this world that runs on debt and is on the verge of collapse as a result? Such a consumptive economic model leads to waste of resources rather than fueling long term growth. What of hedging, that requires some place to park your funds with some level of higher safety than what you're trading in?


I think it's pointless to borrow bitUSD and just let it sit.

I stand by my exact statement.



the official article posts a good strategy for longing bitusd

Cool explanation, I like it!
You can see it as borrowing from yourself. To always keep bitUSD or other at parity, BitShares network must keep the collateral just as you describe. The house is your bitshares (BTS), and you are the bank! We've been talking about it a lot past few days, if it would be better to place a restriction so that once a position is open, it must be closed before adding to the debt. More collateral can be added and that's it until it is repaid - not the current system of 'borrow bitUSD, buy BTS, borrow bitUSD'. This could prevent people from continually go into more debt when price is tanking in a market downward movement such as we saw just the past week. Many experienced traders won't like it, but much more money would stay in the DEX if you think about it. Thanks to @murda-ra of course to a lot of this thinking.


ya I agree. remortgaging is too leveraged and will cause a meltdown eventually. this is actually partly how the real estate crash happened as well

Excellent explanation. You might consider making the image clickable so people can read it. It is might small print on my 15" laptop even in full screen view.


ya you're right. I should have linked a full res version of that pic. will do so for my next post. stay tuned~


We need to talk yesterday. OMG.


I meant to say, we needed this information sooner. It's very helpful. Glad the confusion got you a lot of comment upvotes. I should clarified. I'm upvoting your comment too. Good question. It was on everyone's minds apparently.

You did a great job of explaining this. The mortgage analogy is very helpful.


thanks for your kind words! the great feedback on this post has inspired me to make more! please stay tuned~

Great post. On the link you provided they mention the "bond market", but the link returns an empty page: https://bitshares.org/technology/collateralized-bond-market


hmm ya it does come up as redirected for me as well. maybe bond market is not offered anymore? I have not been able to find that feature as well