Before you start playing around with digital currencies it is important to understand their risks. Like all forms of money there is the risk of losing it and the risk of having it stolen from you. But when you move into electronic money, you encounter a whole smorgasbord of new risks along with all those attractive benefits. This article compares the relative risk of several digital currencies against the all too frequently ignored risks of currency allegedly backed by gold or, ahem, the US Dollar.
Even the world's so-called reserve currency, the US dollar, is not risk free. It's almost guaranteed to lose purchasing power, it can be seized from you without due process, and it is long overdue for the mother of all currency collapses -- this time on a global scale.
And what about gold backed assets? Just how sure are you that the gold is really there and doesn't have multiple owners? Such currencies are only as good as the counterparty that is holding the backing. Which big institution do you still trust?
Digital currencies are designed to mitigate some of these risks while introducing others. The nice thing about having so many of them is that you can reshuffle your risk profile by changing the mix you have in your wallet... assuming that the exchange you are using doesn't freeze up the moment you need it most. This week, for example, Poloniex shut down withdrawals of BitShares and Steem blaming it on the developers of those blockchains. No other exchange had such troubles. What exactly was Poloniex doing behind the scenes with your money?
Rats, there are those darn middlemen again. Humans in the loop!
Of course, if you have a decentralized exchange like BitShares there is no middleman making such decisions on your behalf! And, you can change the risk mix in your basket in about three seconds -- while the world is melting down around you. The whole BitShares exchange is managed by incorruptible robot accountants. Give me that kind of risk any day!
So what risks are left for BitShares and the Hero?
The Billion Hero Campaign will be conducted on a level playing field populated with some of your favorite digital currencies. You can score points by holding any of these popular assets on the robotically honest BitShares exchange:
- Bitcoin
- Ethereum
- Dash
- BitShares
- Hero
- Freero
- Brownie.PTS
Are you saying you're going to let some of your competitors play in this challenge?
Sure, why not? The Harlem Globetrotters always bring the Washington Generals with them don't they?
The risks, Stan, you were going to tell us about your risks!
Ok, ok. Let's start with the lowest risk way to participate in the Billion Hero Campaign and work our way up. Note that this represents my own weighting of risks and your actual mileage may vary. Generally, holding the higher risk assets are worth more Campaign points but there are other weighting factors as well.
Risk Level 1 - The FREERO. We will shortly begin giving these away for free to those who sign up at billionherocampaign.com. There's no risk because they don't cost you anything. But each FREERO counts as one vote toward which team wins the billion-hero-prize. And you can pass them around and trade them to try out the BitShares network without risking your own money.
Risk Level 2 - The HERO. The HERO is a market pegged asset backed by the equity of the Bitshares network. Each one is backed by at least two HERO's worth of BTS and you are guaranteed to be able to cash it in directly with the robotic network for at least 99% of that value, if you can't sell it for more on the open market. That guaranteed cash value is designed to grow by 5% annually against the dollar - so there is less inflation risk than holding dollars. And no one can seize your HEROs.
Risk Level 3 - BTS. BitShares has high market volatility risk. It can pump and dump on you. So you should be prepared for a wild ride holding them. However, if you buy the arguments we make in the webinar below, you might agree that it is well positioned for historic growth in the coming year. Your actual mileage may vary and this is not financial advice.
Risk Level 4 - Non-Native Coins Like all centralized exchanges, BitShares allows you to trade Exchange Issued Assets against its native (counterparty risk free) assets. So, if you are trading tokens representing Bitcoin, Ethereum, Brownie.PTS or Joe'sLubeAndPizza you have the risk that when the time comes to cash out the exchange or company that issued them might fail to honor their promise. Just like Poloniex did to BitShares and Steem depositors this week. Still, while the issuing exchange can be trusted this gives you exposure to the price of all those other coins and the ability to trade them around the world in 3 seconds. You still, of course, have the unique risk of those coins on their native blockchains as well.
Risk Level 5 - Backing HEROs. Don't do this unless you really know what you are doing! This is for professionals only! Remember that guaranteed growth that HERO holders get above? You are the one guaranteeing it! If someone want's to cash out, it's the person who has the least collateral backing their HERO's that get's cashed out. The price of BitShares could be low at that time and you might lose a lot more of them than you got when you first sold that shiny new HERO you decided to back with your BTS. Example of what can happen.
This is not an exhaustive list of risks, just an assessment of relative risks among these five options on the BitShares network. You'll have to decide which you trust more - the trusty BitShares robots or the nefarious Federal Reserve. Either one could black swan on you.
Three minute video on heroic risks
Here's a three minute excerpt from our July 3rd webinar that talks about four of these levels of risk - one for every appetite.
Good post. Keep them coming. We all excited.
Now would be a perfect time to pump BTS and market the heck out of HERO. Seeing BTS go green in the sea of red, and then pushing lots of press on how HERO can insulate a crypto portfolio from volatility would be very well received right now. Now is the time!
This is a very solid strategy. Needs a huge marketing campaign to pull it off. What does BitShares have in mind in terms of marketing strategy? Any ideas?
Stan has hired a top tier marketing firm that specializes in product launches; apparently they are right now firing up a global marketing campaign that involves celebrities, TV ads etc.
Alright! Thats what i was hoping to hear. Based on my limited research so far it seems all the pieces are in place and its simply a waiting game before we get mass adoption and awareness.
Glad I could be an example of what not to do. Heheh.
You know what they say - any publicity is good publicity.
Explaining risk levels is important for new investors who may not realize what they are jumping into... this post is appreciated.
Banks suck. Hackers suck. I love the idea that you can enter the crypto market and sell if you get nervous. Just like playing the stocks or poker. There are always risks. I just can't stand supporting this shitty fiat system anymore. I am jumping out of that matrix. Great post
Yeah, risk is there in all investments. Without risk, there is no gain.
But we should always take calculated risk and risk that much which we can lose. :D
Will look for Hero. Great article. Thanks.:)
Awesome, Stan. This is starting to give us a framework for visualizing the contest. Showing people that they can still contribute with lower levels of risk than backing the HERO. I've been reading a lot of sad stories of margin calls during this downleg, but this is a levelheaded warning and encouragement.
I have another Billion Dollar Idea....
Now I just have to figure out how to start my own bitasset!.. Reading feverishly.
OpenLedger's Steem and SBD gateways were down at the same time as withdrawals were unavailable Poloniex. They took a day or two longer to get back up.
It's a good thing everything is recorded... They've manipulated the market.
Are you referring to Polo, or OL? Or both?
Well, polo. But it would seem that anyone who has "Routine Server Maintenance" during a brutal downswing in the market is probably cheating somehow too.
That would mean Bittrex too for a time.
Strange that everything just keeps ticking along fine on this end but those guys cant keep their steem wallets running.
But what I really want to know is why these guys all have so much steem parked in their steemit wallets. I realize that I am pretty dense, so I don't expect all the details, but for Polo to have 21 million steem sitting here is a mystery to me. I thought they took possession of all the coins that they exchange? It would seem to me that their entire steem market on their end could be paper, until such time as someone wants to actually transfer it somewhere.
And at that time, their wallet is broken.
I think it is BS and a ponzi scheme. They love the liquidity that steem gives them, until someone actually wants to sell into a market collapse.
That is an enormous red flag that calls their solvency into question. Hopefully they are just manipulating the market (and probably speculating with customer funds in the process), but I believe to those of us who traded on Mt.Gox once upon a time (I can only really speak for myself, but I imagine this is the case) find their shenanigans quite worrying.
Great blog mate upvoted and resteemed!
You tons of information here.
I want brownie coins!
i have stopped trying to explain this dilemna to friends. I think they will always love and value their depreciating USD. I'm so glad bitpay is out though!
It will be useful for a long time to come.
I wake up every morning thinking all the crypto will skyrocket.
Nice article man~
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I'm a new investor and thank you for sharing this info. I will share this with my friend.
Thank you for more thoroughly discussing risk levels. You mentioned each Hero is backed by a minimum of 2x it's value in BTS. My understanding is the default collateral slider goes to 6x. Does that mean that most Hero backers get stopped out and forcibly liquidated if the Hero moves more than a factor of 6x down?
There are two ways you can be forcibly liquidated:
The later is a big risk in a falling market. Theoretically you could be 100x collateralized and still called if you are the least collateralized backer out there.
http://docs.hero.global/en/master/ - Great documentation
Thank you, I will check into this document.
This did help answer some of my questions. For example:
"As a consquence, HERO pays no compound interest!"
I wasn't realizing that the 5% interest you note as being "baked in" to the Hero was based on the original reference point value (old USD), and assumed it was just an typical 5% compound annually. That certainly makes the gains seem far more achievable and stable.
There was one part I wanted to double check:
"The HERO does the same, except that it forces the shorters to also hand over a fixed +5% interest per year to the long side of the trades. Independent of the shorters making profit at all, they will need to provide the +5% interest to the long position."
Does this mean the shorters have to "fund" the 5% interest rate out of their "presumed/unbooked" profits on the increasing value of BTS? If so, does that mean if BTS is also dropping, they'll end up having to fork over the 5% plus accept the BTS capital loss (temporary though it may become?)
Thank you for your time!
Yes. If BTS falls persistently, eventually all HERO backers will have to keep adding additional backing BTS to cover HERO appreciation and avoid margin calls. HERO backers are betting this won't happen and that long term BTS will appreciate faster than HERO.
@stan,
What a great post! Really useful for traders and holders of crypto coins. If price of a coin drops people blames that coin and get hurt. But if they follow experts guidance like you provided here can be survive for a long run. Really appreciate your effort to adding a true value to the community! Thanks~
Cheers~
"smorgasbord" sounds familiar :-)
Kanske vi kan prata svenska?
Tack så mycket för informationen.
Very well written and smartly lain out. This parallels some of the discussion of the Fed in a new piece I am writing. Always good to read info you put out. -Cheers
https://billionherocampaign.com
The link doesn't seem to work sir stan.
Check back in a week.
It's good to see you emphasize risk, @stan Becaus up until now the whole Hero project has been greatly misunderstood everywhere. I'm perfectly fine by the risk of holding bts. I'm not fine by missing out on a fair valuation of it. There are a lot of us thinking like this. And most live well with th volatility.
Nice post ! nice blog ! nice man ! bueatiful!