Newton and his classic mechanical laws, that came to my mind lately. Specificly the one about force and the effect on this by leverage. And today @englishtchrivy pointed something out to me that relates to this. "It's all about synchronicity", Jung probably would have said. While handing out copies of the 'I Tjing'. "And this has to do with SteemIt what?", you might ask. And I hope you are able to follow what I'm about to explain.
Did you ever think you could profit from value loss? Not a bit I mean, but at least double your investment in a matter of weeks... Still, before you start trading like a steeming boss, be aware that this is about speculation. And that is just another word for gambling. Like playing poker, you think you know the game, but there is luck involved too.
And this is not a how-to, nor is it a way to trick anything. It is possible to use as an investment strategy: creating leverage by speculating on value drops. In this case, using the market price of Steem.
Using Steem Backed Dollar
The leverage of the total amount of Steem is created by gambling on the sinking market price. Done in such a way that Steem gets transfered into Steem Backed Dollar {SBD}. The value of SBD is kept close to the value of one US Dollar. It is not completely 1:1, not even with the interest of 10℅. But as close as it gets. A safe haven for your earnings or investment, more or less.
SBD is more like a promise
There is no real Steem Backed Dollar but a reserved amount of Steem that creates a matching value. This value is close to the US Dollar, whatever amount of Steem is needed to create one.
So, if the market price is US$ 0.20, then 5 Steem are put in reserve. This creates a promise to you that it is enough Steem Backed for about 1 US Dollar.
No matter if the prise of Steem drops or goes sky high. The amount of Steem in reserve will match the promise to create a value of 1 US Dollar. At a market price of US$ 4.0 only 0.25 Steem is needed. When Steem is at US$ 0.10? Then 10 Steem is needed to create the promise of 1 SBD.
Profit from a price drop
Imagine you have a 1000 Steem. At a market price of US$ 1.0, but the price has been sinking hard lately. You expect an even deeper price drop. But still believe that the price of Steem will recover.
Also you know that it pays good Steem Power when you hold more then 4000 SP. But how to gain more SP in a time where the price of Steem is still dropping. That is where the leverage speculation gets in.
SBD promises value of US€$ backed by enough Steem. So you transfer your Steem to SBD, and there it is. There are now 1000 SBD and you can get interest on it. But you are expecting a price drop.
And then the speculator waits
After a few months the price of Steem dropped to US$ 0.20, but what does the SBD amount show? It is at about 1003 Steem Backed Dollar... Monthly interest added. What would happen now if you transfered your SBD back to Steem?
Well, every SBD is now backed by 5 Steem. So if you sell 1000 SBD. you get 5000 Steem. Then you power up 4000. This will grow your SP with about an extra 1000 SP every 43 days, more or less.
Now how is that for a Steem leverage thanks to speculation on a Steem price drop? There is a risk of course. But that is the gamble that comes with speculation.
Still, it is a huge Steem Power gain. Maybe it helped to make reach the 10K milestone. Curation and self voting, it has more Steem Power, so it will get more out off the reward pool also.
That cannot be right, right? If this leverage trick works, then why are not all accounts doing this? Not even SBD would be needed. Could be done using Tether or NUbits. Any 'coin' that lets you temporarily keep your earnings stable, more or less. So you exchange to stable at high and buy back at low.
Extreme amounts of liquid SBD frozen
Now SteemIt has some limits build in to make sure not all value gets locked into SBD. Or that leverage will lock liquid Steem into huge reserves. That needs to grow as the price of Steem goes down. One measurement taken is that the value of SBD can not be more than 10℅ of the total market capacity of Steem.
If that happens then the value of SBD will be subject to the market price. Meaning it will not be close to US$ anymore. To recover this SBD holders need to sell what they 'locked' in.
Also a different payout system can help to prevent too much value gets locked in SBD. And 'burning' Steem Backed Dollar can help to lower the percentage in the total of market capacity share. To keep it below 10℅, when the price of Steem drops. At some point the price of SBD would be difficult to stabilize. To much Steem needed in reserve to back the value promise.
Measurements for stability
Is using the leverage trick bad for the stability of SBD? Yes, when done on a large scale during a price fall of Steem, I think so. Because a growing amount of Steem would be needed to back the US$ value. The percentage of SBD would grow beyond a level of 10℅ that could be backed safely by enough Steem in reserve.
Not everybody with one or more accounts at SteemIt will probably like this. To see the value of SBD drop might force large holders to sell. In effect freeing the Steem that backed it from the reserve. What will lead to a percentage drop of SBD in the total market capacity of Steem.
And when this drops beneath 10℅ again it would be safe to promise a value of US$ 1 again. More or less. Even becoming better as the price of Steems picks up again. Something the leverage speculator would want too, eventually...
Steem Power will grow anyway
Taking a leverage gamble has no guarantee to get a big gain in Steem. Speculating on a price drop could even take a turn for the bad. So again this is just a post trying to explain some aspects of SteemIt, simplified where ever possible. And it may not even be worth while having a go at the leverage strategy. But be sure you know what you are doing. As always never risk more then you are willing and able to lose.
At least one thing you can know for sure, the Steem Power will grow on. The more you have, the more it wil grow.
Thank you for reading. If you you want to add anything or belief something is incorrect, then please feel free to reply.
pixlrd photo cc-by-sa @oaldamster
This is a 50-50 payout post.