5.2. Short Selling BitAssets¶
In order to increase your exposure to BTS and offer liquidity to BitAssets, such as USD, EUR, GOLD, etc., you can go borrow this bitAsset from the network and sell it short. We will here briefly describe the procedure.
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The BitShares network is capable of issuing any amount of any BitAsset and lend it out to participants given enough collateral.
- settlement price: The price for 1 BTS as it is traded on external exchanges.
- maintenance collateral ratio (MCR): A ratio defined by the witnesses as minimum required collateral ratio
- maximum short squeeze ratio (MSQR): A ratio defined by the witnesses as to how far shorts are protected against short squeezes
- short squeeze protection (SQP): Defines the most that a margin position will ever be forced to pay to cover
- call price (CP): The price at which short/borrow positions are margin called
The BitShares network is capable of margin calling those positions that do not have enough collateral to back their borrowed bitAssets. A margin call will occur any time the highest bid is less than the call price and greater than SQP. The margin position will be forced to sell its collateral anytime the highest offer to buy the collateral is less than the call price (x/BTS).:
SQP = settlement price / MSQR call price = DEBT / COLLATERAL * MCR
The margin call will take the collateral, buy shares of borrowed bitAsset at market rates up to the SQP and close the position. The remaining BTS of the collateral are returned to the customer.
Read more about the margin call mechanics before trading.
Holders of any bitAsset can request a settlement at a fair price at any time. The settlement closes the borrow/short positions with lowest collateral ratio and sells the collateral for the settlement.
Note, that there is a maximum daily settlement volume (currently 2%) defined by the committee to prevent exploitation via external price movements.
After burrowing bitAssets, they can be sold free at any of the corresponding markets at any price a buyer is willing to pay. With this step, the short-selling is now complete and you are short that particular bitAsset.
At any time, the holder of a borrow/short position can modify the collateral ratio in order to flexibly adjust to market behavior. If the collateral ratio is increase, an additional amount of BTS is locked as collateral, while reducing the collateral ratio will require an amount of the corresponding BitAsset to be payed back to the network.
To close a borrow/short position, one must hold the borrowed amount of that particular bitAsset to hand it over to the BitShares network. After that, the BitAssets are reduced from the corresponding supply and the collateral is released and given back to its owner.
Shorts can pick their place in line for settlement. Think of it this way, if you fall in the bottom 2% of shorters by collateral you have been given notice of potential margin call since only 2% can be settled, daily. This is like any other market where they give you 24 hours to add collateral. If someone is short and doesn’t want to meet the new higher collateral limits then they can either cover on their own terms or add collateral.
By giving 24 hours shorts have an opportunity to cover prior to any price manipulation by big players.
If there is a 10% premium on BitUSD relative to the feed, then the attacker would have to increase reported price feed (value of BTS) by 10% just to get the force-settlement price to equal the previously fair value for BitUSD. They would have to push beyond 10% before the short starts taking a loss relative to a voluntary cover. All savvy market participants would be aware of a large force-settle order and would therefore reset the manipulator making it much harder to manipulate the price. In effect, price manipulation represents “free money” to those who know it is going on.
Look at it another way, someone enters a large force-settlement order it becomes an opportunity for the shorter to do reverse manipulation. It is a tug of war where both sides (short and long) have equal opportunity to manipulate the market in their favor. They go to battle and the result is just the fair market price at that point in time. It is not a guaranteed win for the potential manipulator.