Why I am converting SBD into Steem now
Hi everyone,
this is a rather technical post and I am not 100% sure if I have understood everything correctly. So please do not take this as financial advice - and correct me if I made a mistake. I have been helped to better understand the technicalities by discussions with @reggaemuffin and @therealwolf as well as a post by @themarkymark ( link) and some comments made to this post by @smooth. Also, I did use the official Steem Whitepaper.
So lets start:
May first idea was plain and simple - the value of 1 SBD is currently around 0.80 USD on the exchanged - but via the convert function I am able to convert 1 SBD into 1 USD worth of Steem. It will take 3.5 days for the conversion to be done and I will not get the current price of Steem but the average price over this period, but hey, there is a 20% margin of safety for this trade to work out as I have to pay only 0.8 USD to get one 1 SBD. Sounds like a simple and highly profitable deal - and the best is, I would even help to save the peg of the SBD to the USD by reducing its supply (my SBD will be burned).
Saving the peg?
But wait a minute - when I am helping to save the peg - is the peg in danger and how does it affect my trade? After some more research I realized that conversions for 1 USD will only be possible if the debt ratio does not surpass 10%. But what is this debt ratio and how is it calculated?
The debt ratio
The debt ratio is calculated by (virtually) converting all SBD into Steem and then calculating the ratio of this amount to the full virtual supply of Steem, which includes the current supply as well as the virtually converted SBD. This current ratio can be found for example at steemworld.org. Looking it up shows that the current ratio is still well below 10% - so I should at first glance be safe as I would suspect many others to to the same operation, which would result in a reduction of the amount of SBD.
Looking backwards...
However, the current ratio is not what is relevant for my conversion. It is calculated by using the 3.5day average price of Steem, which is currently around 0.575 USD. Unfortunately, the huge decrease in the Steem price over the last days has resulted in a current Steem price of only 0.40 USD. Not so pretty...
… into the future
If we assume that the Steem price remains at 0.40 USD for the next 3.5 days, the relevant price for my conversion would be 0.40 USD. Doing the math based on this price would result in a SBD Debt ratio of 11% - something which is ruled out by the creators of the Steem blockchain. This means that if the total supply of SBD and Steem as well as the price of Steem remain unchanged, I would not get my SBD converted into Steem for the price of 1 USD worth of Steem for 1 SBD.
But what does this mean?
The blockchain will automatically reduce the conversion ratio downwards. This is necessary in order to make sure that in case of a black swan event Steem does not become inflated to an infinite amount. This could happen if the total market cap of Steem would fall below the theoretical market cap of the SBD, which is currently around 14 million USD. In this case, there would not be enough Steem available to convert all SBD into Steem for a thoretcial value of 1 USD per SBD.
If my understanding of the whitepaper is right, the conversion price would be brought down to the price, at which the 10% limit would not be exceeded. In our example and assuming supply and price to remain unchanged, this would mean that Steem has a total market cap in USD of USD 113m. Given that the debt ratio is allowed to amount to up to 10%, this would represent 90% of the virtual market cap of the whole Steem universe, which would thus amount to 125.7m USD. This leaves a market cap of 12.6m USD for the SBD part. From this we can calculate the conversion price, which amounts to 0.90 USD.
Here is the deal
So in case nothing changes, I would not be able to convert 0.8 USD worth of SBD into 1 USD worth of Steem - but I would still be able to convert it into 0.90 USD worth of Steem - which remains a great deal.
Is this a safe profit?
No, it is not possible to game the system and make a sure profit. E.g. the Steem price could go down a lot more - lets assume it goes to 0.20 USD over the next 3.5 days, with the average amounting to 0.30 USD. This would lower my conversion price to 0.67 USD - a loss of 16% versus the alternative to hold fiat. But it is still the far better deal than to own Steem directly.
What might also happen is that the Steem price recovers - lets say to 0.8 USD over the next 3.5 days - an increase of 100%. Assuming that the average price would then by about 0.60 USD we would be able to convert at a value of 1 USD - but not based on the current price but on the average price over the last 3.5 days. We would thus get 1.67 USD worth of Steem based on the last price - while we would have gotten 2 USD in case we would have invested in Steem in the first place. This would be a nice profit - but only if we have not sold Steem in order to buy SBD in the first place.
Is there something that could also work in our favour?
One thing that could work in our favour is the fact that the supply of SBD might shrink as user convert their SBD into Steem. However, this is a double edged sword as this is also putting pressure on the Steem price, which is working against our odds in this trade.
Conclusion
To be honest, I did already start to convert before I even completely understood what I was doing. Not very wise and clearly not something which is advisable. With what I know now, however, I continue to believe that this remains a smart trade. I like the idea that I have a bit of downward protection, while at the same time being able to benefit from a possible rebound of the price. This is why I continue to buy additional Steem for Fiat, convert it to SBD on the market and then use the convert fuction to convert it into Steem again.
As mentioned above, this is no financial advice and I would also not rule out that there might be a mistake in my thinking. The whole stuff is extremely complicated to understand and not straight forward. If you see any mistakes in my thinking, please let me know.
Best regards,
Tim
Thank you for writing this post! It is a good summary.
Conversion is an advanced feature and not a surefire profit thing, but done right it can do many good things for the blockchain and the one converting.
Currently the whole market is being tested and we have a case study of why conversion was done and can see if it is actually useable :) I am very curious and have converted some SBD.
Thank you very much for your help in researching this topic - let's see how things play out!
I have also been doing this. I will keep you in the loop
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Spannend - wo kaufst Du genau?
Lach mich nicht aus, aber ich kaufe Bitcoin bei Coinbase und transferiere den dann zu Binance - da kaufe ich dann Steem. Und Steem tausche ich dann entweder am internen Markt oder über blockgrades. Ist bestimmt nicht der billigste Weg, funktioniert aber.
Achso - ich dachte Du hast nen direkten Weg entdeckt 😎
Interesting, did read the original whitepaper a couple of years ago, was thinking about this and pondering. You have done a great piece of content explaining more, thanks Tim.
Thank you very much for your feedback joanstewart. I looked at this and found that there is not so much information easily available so I though - just make a post out of it. I got great support from some of the witnesses and really hope that everything is correct now.
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if you are doing it for profit then why not also just buy the SBD and keep it till it goes back to the 1 dollar mark partly because of the system described above
that would give you roughly 20% profit
Hi felander,
this is of course also an alternative - but it does not have to happen if the peg breaks. But even if the peg breaks, converting might still be profitable. And also, I like the idea of supporting the eco system by helping to keep the peg.
Awesome article. Thanks for this helpful article
You're welcome. Glad to hear that it was helpful.
Great post!!!
I think another central question is if conversion is "more profitable" than buying STEEM from SBD on the internal market. To my understanding, this is not really easy to answer. STEEM was falling faster than SBD in the last couple of days, giving a better STEEM-per-SBD price in the internal market than the current 3.5 day median. But since conversion will use the median in 3.5 days, it's hard to tell which method gives better returns. The internal market doesn't reduce the SBD supply, so conversion may have longer-term benefits...
Thank you for your feedback. It could of course be better to trade SBD into Steem on the internal market - but only if the Steem price rises. You will then buy your Steem with today's low price instead of the 3.5day average - which is most likely lower than the average in case we see a sharp increase.
Sounds like I could take some advantage out of it. Thanks!
Whatever you do, I wish you good luck!
I have changed to steem.
because I'm sure.
will be profitable
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