How to Trade Digital Currency & Assets on the Bitshares Decentralized Exchange
Latest posts by Dean (see all)
- Aeternity: Fast, private smart contracts, an oracle machine & truly decentralized mining - March 29, 2017
- MetaGold: Some of the Best Games using Ethereum! - March 27, 2017
- The Scarab Experiment: Creating A Decentralized Artistic Personae - March 16, 2017
Bitshares is one of the most unique and innovative of the ‘Bitcoin 2.0’ projects seeking to use block chain technology for more than just creating a digital currency. It is a ‘Decentralized Autonomous Corporation’ whose owners (anyone who owns any BTS, the system’s native cryptocurrency) elect a board of 101 ‘delegates’, who serve as the company’s board of directors. At its heart is the Bitshares decentralized exchange, which can be used for trading various assets, including assets which track the value of ‘real world’ currencies, commodities like Gold, or a digital currency like Bitcoin, without the need to trust your wealth to a central bank or exchange. Like any financial market, there are plenty of opportunities on the Bitshares decentralized exchange for traders to make themselves a profit, or a loss, depending on their performance. In this article you will find a beginner’s guide to using the Bitshares wallet to try to make a profit from trading.
Bitshares Decentralized Exchange: The Basics
The main feature of the Bitshares exchange is something called ‘BitAssets’. These are market pegged digital assets whose value is tied to that of a specific asset outside of Bitshares. To put it more simply: 1 BitUSD is designed to always be worth 1 USD, 1 BitEuro is designed to always be worth 1 Euro, and so on. This works for commodities, such as gold or oil, just as well as it works for currencies like the USD or Euro or a new digital currency like Bitcoin. You can view the full list of available assets from your Bitshares wallet.
The mechanism which keeps the price of the BitAsset the same as the price of the external asset which it is tied to relies on traders using the decentralized exchange, in their own self-interest, in the hope of making a profit. If you decide to put what you learn in this tutorial to use, then you too will be contributing towards maintaining the market peg of any asset which you trade. This works through something called a ‘prediction market’, in which traders open positions according to whether they think the value of the asset will rise of fall relative to BTS. Using this prediction market you can either buy a BitAsset, in which case you will earn interest just for holding on to it, or you can ‘short sell’ the asset using BTS as collateral. To short sell means that borrow an asset in order to instantly sell it, thinking that you can buy it back for less money in the future and therefore pay back your debt and make yourself a profit. All BitAssets which exist are ‘borrowed’ into existence like this. The decentralized software acts like a deCentral Bank, creating the asset in order to lend it out in the same way that our banking industry creates fiat money when it makes a loan. But unlike the traditional banking industry, for the Bitshares system to lend you a BitAsset you must have BTS coins worth 4 times the value of what you want to borrow, and this BTS will be locked up by the system in order to automatically cover the cost of repaying your loan if the market moves against you. When you ‘cover’ your loan, which means repaying it, or if the system is forced to do so for you using your collateral , the BitAssets that you created when you made the short sell are destroyed.
You can also use the decentralized exchange to trade user issued assets which are not tied to the value of anything else.
Getting Started with Bitshares: Wallets and Accounts
In order to use Bitshares you will need to get yourself a wallet and create an account. You can download the latest stable wallet release from Bitshares.org. Creating an account requires a small amount of BTS which you can get from the Bitshares Faucet. You can have as many accounts as you like and each one can keep its own separate balances, but having too many accounts running on the same machine can be an excessive drain on your computers resources, potentially slowing it down or causing other problems.
If you need a more detailed guide to this here is a handy video tutorial:
How to Buy BitAssets
Buying BitAssets such as BitUSD, BitCNY or BitSilver is actually very easy to do. You will need to have some BTS, as this is the native cryptocurrency for Bitshares and the base currency of the decentralized exchange. You can buy this from various different exchanges such as Poloniex.com.
When you are ready click the ‘exchange’ tab on the navigation bar along the top. You will see a search box, some information on featured markets, and then a list of different assets you can buy or sell. Click on the asset you want to trade followed by the blue button saying, for example ‘trade USD/BTS’. You should now see a couple of graphs showing price history and some key information like volume and latest price along the top. Underneath this you will see all the buy, sell and short sell orders currently on the market. Along the left you will see some tabs and a form which you can use to buy, sell, short, or cover yourself. To buy or sell all you need to do is to take a look at the offers already on the market, and perhaps the call price (provided by delegates based on the BTS exchange rate from more traditional exchanges) and then enter in the amount you want to buy or sell along with the price you want to pay – it will automatically calculate the total price for you. You can also type in the total amount you want to spend, and let it calculate the how much you can buy at your given price.
If there is nobody willing to sell at that price your offer will stay on the market until it gets filled, or until you cancel it. Your open orders will appear underneath the order form along the left hand side. They are colour coded to match the tabs – green for buy orders, red for sell orders, blue for short sell orders.
You get paid interest for any BitAsset which you own. The exact amount depends on the people who borrow it into existence using the short sell feature described below, so less popular assets may have a higher rate of interest to tempt buyers into making a purchase. This interest will gradually increase over time and is paid to you when you eventually the sell your BitAsset. If you are a long term ‘buy and hold’ investor, however, please remember that there is an inactivity fee levied on accounts which aren’t used for over a year, so please make sure that you log in from time to time and make a small trade, even if its just transfering 1 bts between a couple of your own accounts.
How To Short Sell BitAssets
Short selling a BitAsset such as BitUSD is a little bit more complicated than buying or selling, but its still fairly easy once you know what you are doing. By short selling you are effectively making a prediction that the value of the asset will go down relative to BTS. You might do this because you think the asset itself is overvalued, but you may also do this as a way to profit from rises in the price of BTS – so for many people this is an additional way to profit from the success of Bitshares.
To start off with you should go to the market page for the asset you are interested in shorting, just the same as you would if you wanted to buy. The tab for short selling is right next to the tabs for buying and selling. When you click that short sell tab you will see the following empty fields to be filled out:
- Quantity: For example, if you want to buy1 BitUSD you would enter a quantity of 1 into the box
- Interest Rate: This is the annual rate of interest you are willing to pay to whoever owns the asset you short into existence. You pay this when you ‘cover’ your short by buying the assets you owe to the system on the open market and repaying your debt.
- Collateral: This is the BTS held by the system to pay your debt for you if the market turns too far against you – it means you can’t be left unable to pay your debt. Its automatically set to 2x the value of the assets you want to borrow. For example, if you want to short 10 BitUSD you will need to have $20 worth of BTS to put into collateral. You cannot change this – it will be automatically filled out when you choose how many of the asset you want to short, or alternatively you can fill out the amount of collateral you have and the system will calculate how much of the asset you can short.
- Price Limit: You can leave this blank if you like, in which case you will execute a short sell at market price whenever a buyer is willing to pay market price and you are offering the best interest rate. Alternatively you can specify at exactly what price (or better) you are willing to short sell.
Then you just need to click the short sell button! If you call it wrong and the value of the asset goes up too much against BTS then your collateral may be used to automatically buy enough of the asset to cover your debt. If you click the cover tab you will see a list of all your open shorts. Each one will have its own ‘call price’. If the delegate call price shown near the top your wallet hits the call price of one of your shorts then this automatic sell off, called a ‘margin call’ will take place. You can also buy the asset at any time and then use it to cover one off your shorts from this same tab. To ‘cover’ just means to pay back your debt and close your position.
If you want to see the current short sell orders and approaching margin calls on the orderbooks from other people then you need to click the boxes for them next to the buy and sell orders.
Now go and enjoy some profitable trading!