Some speculation on HBD price movements and how it impacts proposals

Why am I writing this post?

I recently unvoted all the proposals that I was voting for (unvoted on a temporary basis only) so that the @hbdstabilizer would receive more funds to fight the price spike in HBD. While I’ve explained my reasons for that action in various places on the blockchain and elsewhere, it seems like it’ll be more efficient to make a post that describes everything in one place, hence this post.

Or, that was my original plan for this post.

But this post has grown so long, I’ve decided to separate the discussion about proposal funding into a separate post, to keep the resulting comments from readers segregated better, and keep this post focused on the root reason for my voting action, which is the price action in HBD.

Why did HBD price increase recently?

I want to address this issue first, because it’s the reason for everything else that will be discussed in this post and the next one, and I think this is one of the most confusing things for many people, from the comments I’ve read here and elsewhere.

First, I can’t say for certain why HBD price is going up.

But, in my opinion, there are only two reasonable possibilities: 1) a completely random increase by really bad speculators (relatively unlikely I think) or 2) an attempt to pump the price by someone who has previously acquired a fair amount of HBD (this is most probably the reason, in my opinion).

I think these are the only two reasonable possibilities, because HBD lacks most of the characteristics that might conventionally cause a cryptocoin to increase in price (for example, I’ve seen very little promotion of the coin as something to HODL, at least on the sites I frequent (aka Hive-related sites).

For the rest of this post, I’ll be writing with the assumption that the increase in HBD is due to an active attempt to pump the price of HBD, but everything would mostly apply in the case of a random price increase as well (well, except for the next two sections, which you could skip, if you don’t think there’s a price pump going on).

How a pump is engineered

Since I believe a price pump is the most likely reason for the increase in HBD price, I’ll go into a little detail on how such a pump can be engineered. The basic idea for a pump is simple: the pumper acquires a coin for a low price (because it’s not worth a lot inherently), then makes some public trades with themselves to raise the quoted price for the coin.

This technique for increasing the price on an exchange is only really feasible when the pumper does the trades with themself on an exchange without much active trading by other people. If there’s many other people trading there, those people will start selling the pumper a lot of the coins at the new higher price, and also make it difficult for the pumper to raise the price.

So the pumper will generally try to find a coin that isn’t traded a lot and has a limited number of existing holders that might trade it. When possible, they will also look for an exchange where the number of potential trading partners is limited (for example, a low volume exchange that is not easy to join). This allows them to raise the price easily.

As it happens, in normal times, there isn’t a lot of HBD being traded. There’s various reasons for that, and we’re planning changes to increase it’s pegging that will likely cause it to be traded more in the future.

But for most of its history, it normally trades at low volumes, which makes it a potential target for a pumper. We saw this happen many times in the past for SBD, for example.

While I can’t be sure of the mechanism by which the pumper then promotes the coin at its new, higher price, I wouldn’t be surprised if they don’t really need to do anything at all: there’s many “price/volume” watching metrics on exchanges and third party sites that bring attention to any coin that is moving rapidly in price and volume. These very metrics can act as a promotion method for the pumper to inexperienced technical speculators who don’t bother to do a proper investigation into the fundamentals of the coins that they buy.

So, just to complete the circle on how this works:

  • pumper buys a lot of the coin at the “reasonable” price from other people
  • pumper raises the price (and trading volume) by trading with themselves to create an unreasonably high quoted price that may fool the unwary
  • pumper profits by selling the coins they bought at the reasonable price to unwary speculators at the unreasonable high price

Now, this tactic can go wrong for the pumper. For one thing, this kind of activity is illegal in many jurisdictions. And even that aside, the pumper will wind up paying unreasonable prices for some amount of coin as they pump up the price (how much depends on how often they are forced to buy some coins from other people due to the trading volume). So if they can’t later unload enough coins at the high price, they can lose money. This is why it’s so important that they choose a coin with a low initial trading volume.

Is pumping immoral?

Yes. It’s a deliberate attempt to fool people and extract value from them without delivering anything real in return. It’s basically a form of fraud. I realize a lot of people who are new to trading don’t realize this (and there’s a lot of inexperienced traders in crypto and in regulated markets for that matter), so I think it’s important to highlight this.

There are “pump groups” out there who actively try to attract other people to help in their pumping efforts. Please don’t participate in such activities: you’re likely to be cheated, and even if you’re not and they are “honestly” including you in the pump rewards so that you make a profit, you’re still cheating someone else.

Why do we want HBD to be relatively stable in price?

When you want to contract for any kind of long term work, it’s important for your contract to be formed with a relative stable payment value. This is because an unstable payment value leaves either the buyer or the seller unhappy because an originally fair agreement (fair from the perspective of the buyer and the seller), becomes unfair. And if either party is unhappy, it causes ill will, and discourages further contracts.

This principle is well understood in economics, and it is easy to look at places in the world where the currency is devaluing rapidly and see the problems that result. No one wants to take the devaluing currency as payment, and most trading ends up being done in some other, more stable currency. For example, it’s quite normal in countries with a rapidly devaluing currency for people to request payments in US dollars instead, which are readily available in many places, and relatively stable in value.

Having a stable currency on Hive will be extremely beneficial, in my opinion.

The proposal system itself already benefits from the quasi-stability of HBD, versus the much more volatile price of Hive. There was a similar proposal system on BitShares that paid out in the native currency (BTS) and the erratic values paid to proposals caused so much controversy that ultimately most of the proposals ended up being paid to a central entity that acted as an escrow agent, accepting the bitshares paid by the proposal system, then paying out a fixed USD value to the individuals doing the work. To mitigate this issue, Hive’s proposal system was designed to payout in HBD instead of Hive, and for the most part, this has worked out well and has obviated the need for a trusted middleman to act as an escrow in most cases.

Methods for increasing the stability of HBD value

hdbstabilizer bot

Currently @smooth is running the @hdbstabilizer bot to help stabilize the value of HBD. It’s a stopgap measure, until we can implement a more powerful method with the next hardfork (a Hive→HBD conversion operation). I won’t go into detail here about how the stabilizer works, because there’s already been several posts by others that describe the mechanism in depth.

But while it’s only a stopgap measure, from my point of view, it’s already had perceptible impact on the price stability of HBD. At the height of the pump attempt for HBD so far, HBD only reached around $3, whereas in the past, we’d seen SBD go to much higher values during a pump (and last time I checked, SBD, which has no corresponding stabilizer running, was quite high due to the pump going on there). And that $3 price didn’t last long. As of this writing, HBD is just a little above $2.

The more funding received by the stabilizer, the more effective it is at fighting efforts to pump the price of HBD. Due to the mechanics of the Decentralized Hive Fund (DHF) that is funding the stabilizer, plus the profits to the DHF itself from the stabilizer’s trading, the amount of HBD funding available to fight the price pump is slowly increasing.

Hive → HBD conversion operation

This new operation will have more power to pin the price of HBD than the current stabilizer bot, mainly because it will enable faster creation of more HBD. As mentioned previously in the section on the stabilizer, this is the main limitation on its ability to fight a pump in HBD (the budgetary limits imposed on the DHF when it comes to distributing HBD to the stabilizer).

An interesting potential side effect of adding this operation is that it should offer some reasons for buyers to hold liquid Hive as well, because liquid Hive holders can use it do profitable arbitrages whenever HBD rises above $1. Of course, the fewer times that HBD rises above $1, the less profitable this becomes, so it’s hard to predict how much this effect will occur, if it keeps HBD as stable as expected.

Price transference from HBD to Hive

One final important point: both of these stabilizing mechanisms essentially work towards moving any price appreciation of HBD into a price appreciation of Hive to some extent (although the stabilizer probably does this more efficiently because an arbitrager using the conversion mechanism may just elect to keep their arbitraging profits in some coin other than Hive). This is because both mechanisms create a demand for Hive that can be converted to “reasonable price” HBD, where the resulting HBD can then be profitably sold on the open market, whenever HBD exceeds the reasonable price of $1.

This price transference also has another beneficial effect: due to the mechanisms by which HBD is created, an increasing market value for Hive also allows for a larger supply of HBD to be created when needed to meet increasing demand for HBD as a stable payment method.

Upcoming post (tomorrow): weighing the merits of current proposals

Generally speaking, I think I’m one of the biggest proponents of using the DHF to fund development. But at this particular moment, I believe the merits of the stabilizer outweigh any other active proposal.

I’ll go into my reasoning for that in my next post, so please confine responses on this post to a discussion about HBD itself, just to keep things logically organized and avoid asking questions that will probably be answered in my next post anyways.

3 columns
2 columns
1 column