If you've been transacting in SBD lately, you may have noticed that it's trading at a hefty premium to the dollar:
That's a lot of money for a token that's supposed to have a value equal to $1. What's happening? Well, any pegged cryptocurrency (such as a BTS smartcoin, SBD, or Nubits) needs to have both of these mechanisms:
- When the price of the coin is lower than desired, there needs to be a mechanism to reduce supply.
- When the price of the coin is higher than desired, there needs to be a mechanism to increase supply.
The price of these tokens is determined by a lot of factors, and one of those factors is the balance of supply and demand. If we increase the supply, we push down the price.
In Steem, there's no quick way to increase the supply of SBD to push down the price. SBD is basically only generated when people earn it with author rewards. That's a relatively slow trickle, and it's not able to respond quickly to the kinds of massive pumps that happen frequently on cryptocurrency exchanges.
What can you do about this?
Two things:
- Make sure you're getting your posting rewards as SBD:
If you choose 100% Power Up, you're both missing out on the SBD premium and you're failing to help the system print more SBD to drive the price down to where it should be. - Sell all your SBD! I mean all of it! every penny! Go to the market and buy STEEM with it, or send it to Polo or Openledger and buy something else with it. It needs to be out in the market pushing the price down, not sitting in your wallet gathering the dust of foregone profits.
How do we know the price will come back down to $1 eventually?
Technically, we don't. Technically, demand could outweigh supply for a long time. But here's the reality: SBD will continue to be printed until the price comes down. That's the fact of how this system works. So if it stays pricy for a long time, it will be fighting the fundamentals to do so.
Should I convert to STEEM?
NO, NO, NO, NO. You should sell. You should never convert unless you absolutely know what you're doing; if you do that now, you'll both lose a ton of money and unnecessarily destroy SBD. Let's look at the drop-down box on the wallet screen:
Do the green one. Your wallet and your community will thank you.
I read all the comments and am still confused.
I usually send my sbd to @blocktrades for steem power directly. Can I make out buying steem from them and then powering it up internally?
Thanks so much!
Ah! I think I got it right! I just paid a bit over 12 sbd for 17 steem which I then powered up!
Trading SBD for STEEM in internal market (Market button) is cheaper. Since blocktrades may take some fee. However, you can check conversation rate for both source.
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Blocktrades for that kind of transaction acts as the "exchange" so you did it right. You basically sold Blocktrades your SBD and bought STEEM, considering STEEM is currently cheaper than SBD you probably did okay. STEEM should be the token that eventually jumps in price and you will have earned a lot more for holding STEEM than by holding SBD.
Well done!
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Yep, that's perfect. The two most important things from my article:
Everything else is "do whatever you want." Cheers!
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I understand everything you're saying except for the last part. Why would converting it into Steem hurt the community? I fully expect this apparition to right itself and for steem to be the dominant currency, so why not take advantage and convert 20SBD into 30 Steem while I can?
Because there's a difference between converting and selling. Converting does not give you the market price! When you convert, you get the price of STEEM in USD, not the price of STEEM in SBD. There are technical reasons for this that are important, but unfortunately this makes it incredibly confusing.
Right now, if you convert 20 SBD, you'd only get about 17 STEEM for it (20/1.15). Instead, if you go to the market and sell, you'd get 28 STEEM for it.
It all comes down to the original Steem dev team's poor decision to use the word "convert" for the operation that destroys SBD.
Anyway, do you believe me that there's a technical difference in Steem between "convert" and "sell"? If not, I can try to be more clear.
Ah my bad, I misunderstood. Yeah, never straight up convert it through that button. I went to the internal market and sold/converted it for about 1.5x. Thanks for the clarification
Right, excellent. I wish Steemit would just remove the option to do the destroy/convert operation.
You can't remove the option to convert SBD to Steem without destroying the peg, which is the raison d'être of Steem Backed Dollars. Check out the name, by decree of the Steem Blockchain, 1 SBD is at a minimum worth 1 USD worth of Steem. SBD is basically an IOU from the Steem Blockchain to the holder for 1 USD worth of Steem. Without the convert option the guarantee of 1 USD of value is gone and you're left with nothing more than just another crypto-currency that offers nothing more than what Steem already offers.
A short historical side note: At one time the USD was backed by gold and the holder of 1 USD could go to the treasury and 'convert' that 1 USD to 1 USD worth of gold. That is what is meant by backing a currency. The backed currency is convertible to another store of value on demand and that conversion is what gives that currency its value.
SBDs is a useful currency because it offers this peg that acts as a rock in the turbulence of the crypto market. When the price goes above 1 USD people will dig it out of their wallets and sell it. Which will drive the price down. When the price falls, people will convert their SBD holdings to steem or buy SBD to convert to steem and the price will go up. If everyone is patient the market will fix the problem for you. If you understand the rules of this market, you can not only help restore the peg for SBD but you can profit from helping to restore the peg.
As for hurting the community, I don't understand what damage the community is suffering right now. It is a bit inconvenient for those (myself included) who are looking for a pegged currency to 'lock in' their profits from the recent upswing in the overall crypto market. However, such is life. To complain about this is sorta like complaining about overeating at Thanks Giving to a starving man. Be happy with the upturn, be patient, and the great forces of the Steem economy will return the peg shortly.
It's cool how you just assumed I didn't know what I was talking about, and then wrote a novel to tell me that I'm wrong. I think you just mansplained me.
Indeed. But right now people are converting in droves because they don't understand what it means. Steemit can remove the "convert" button, but leave the blockchain operation intact.
The forces only push the peg in the right direction if people understand them. Hence my post, helping people to understand them. We are all market participants, and I am currently participating in your mystical "great forces of the Steem economy!" It's actually pretty magical.
Please forgive me for 'mansplaining to you'. My actual intention was to mansplain to any one who did not understand the situation or for normal people, just explain. So that everyone that read it can not only participate in the solution but profit from the solution. Please note that this response was not directed to you. It was a response to the whole thread in general. You simply provided me with a good segue into the topic. BYW, how do you know that I'm not a woman? In which case you should have said 'womansplained'.
As for the removal of the convert button, yes, the blockchain would still function. I never said it would not. What I said is that the unique usefulness of SBD would be lost as the peg to USD would be destroyed. This solution would prevent people from converting when the price is above 1 USD. However, it would also prevent people from converting when the price is below 1 USD, which could potentially allow the value of the SBD to drop to 0 and destroy it even if Steem is strong. The convert button is a tool, and with any tool people do need to understand how to use it safely. So they don't disadvantage themselves. That is why I 'wrote a novel' not to embarrass you but to inject a bit of understanding into a thread that I hope will be read by many and of course maybe get a few upvotes.
Also, since when is 4 paragraphs a novel? It's like 10 minutes of writing.
I read your article and was not sure why you were advising not to press the "convert" button. Was it because it would be a waste of cryptomoney for me and that I would make more money selling thorough the market, or was it because you thought the price being out of wack was damaging to the economy as a whole, and thus I'd add to the problem by "converting" SBDs? In other words, I wondered if you were advocating your position on ideological or practical grounds.
The reply from @voice-of-reason cleared that up for me. So please don't get butthurt from his elucidating comment. Maybe you can learn to bring more clarity to your own writing from his feedback.
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i dont understand sbd at all. how in the world is it supposed to represent $1 of steem, if it can be freely traded? i really dont get it
SBD is a smart contract that "guarantees" that you can convert your Steem Dollars to 1USD worth of Steem. This mechanism is useful when the market price of the SBD goes below 1 USD. So if let's say that SBD is at 0.80 USD instead of selling it for BTC you can convert it to Steem and sell the Steem for BTC.
Converting to Steem reduces the supply of SBD and helps to bring the price up when the market value is below 1 USD,
However there is no mechanism to bring the peg down to one dollar. For this the supply of SBD needs to be increased. The only way to do that is to select the 50/50 option when doing a post and then selling the Steem Dollars.
oh wow! thats awesome. where does the contract get steem price?
The witnesses constantly publish the price feed of steem. The blockchain takes the median price to make the conversion.
Note: I used the word guarantees inside quotes because the conversion takes 3.5 day to execute. This is done to avoid market manipulation.
You can see the price feeds of the witnesses in https://steemd.com/witnesses.
Another way of maintaining the price is to encourage (or discourage) people to hold SBD instead of selling it by changing the interest paid for holding SBD. If the price of SBD is below 1 USD the witnesses can increase the APR. If people hold Steem Dollars to get the interest that reduces the supply and pushes the market price up.
The Steem witnesses publish a price feed; a moving median of those feeds is the contract's reference price. You can see each witness's feed here: https://steemdb.com/witnesses
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This comment explained to me best the use of SBD and the purpose of its "peg". Thank you for that.
So it's a supplementary currency to that of Steem. But what is its purpose if you keep getting Steem anyway? So that if the whole market crashes, you could fight off the "inflation" and get the current $worth of Steem for half your earnings? I guess.
But I really don't see how people could expect it'd never go up.
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whats this now? thank you i guess??
@biophil, thank you so much for all the useful information in this post and thanks to all that have taken the time to write such helpful comments.
I was originally on your page wanting to learn more about the POCKET sub chain, until I came across the BEST explanation on SBD, and why they are so important. There's been a massive increase of interest and new projects using sub chains on Steem.it. I believe that soon, these projects will become very beneficial for the entire community. Steem.it has huge untapped potential and is headed in the right direction. It's an exciting time to be here!
I have been following, for a couple of weeks now, the posts on SBD and everyone stating that now is the time to sell. I haven't sold yet, because until reading this post, I hadn't fully understood the entire concept behind SBD. I'm confident that I'm not the only new Steemian that was unsure of this, so I Resteemed this, hoping that other new members will take the time to read and understand the importance of keeping SBD in the Market!
Now, I'm going to follow your advice, sell, and check my settings! Then, I will head back to learn all I can about POCKET.
Thank you again for such a simple, yet in depth, & detailed explanation :)
My pleasure :)
I wanted to let you know how well it went after following your advice. I still can't believe 5 minutes made that much of a difference! I did as you instructed, went to the Market and SOLD my SBD (I didn't have much). Within minutes that little red circle popped backed up with 4 new notifications. My account's value jumped up over $6, simply by selling the little bit of SBD I had, which not only helped me, but put the SBD back into the community instead of it being destroyed! I then went on to power-up, allowing for my up-votes to actually be worth a little.
Thanks Again!!!
I just read through more of the comments and would like to add a point to the "discussion" regarding long comments. I am fairly new here, so I tend to read articles much, much, more than I post. I never knew long comments were frowned upon. Seeing as how they do take up so much space, I can understand the point being made against them. As a newer Steemian though, I would like to add that I have learned a lot from comments alone. Steem.it is a very complex platform and there's not a good guide that explains everything. It's more of a learn as you go process and some of the longer comments have taught me quite a bit. In the future though, I will keep my comments shorter, simply because the amount of wasted space they take up :)
There's nothing wrong with long comments. Nonsense.
Very interesting. I did not realize that the "Convert to Steem" button destroys SBD. Thanks Biophil, nice job!
Many don't realize this.
Hmmm. Important information! Never using convert again, and I will stop with my 100% power up posts. I am trying to buy steem with whatever little SBD I have. For those of us not versed in trading, what price would you recommend I set there? Just... whatever the ask is?
Thanks a million! Resteemed for us cryptonoobs.
If you're trading in the Steem market and you're only doing a little at a time (like $100 per order), you're pretty safe just buying at the ask price.
Thank you! Done just that. Gonna follow you in case you have more tips like that! <3
Cool. I post stuff like this now and then, hopefully it's all helpful. :)
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Can anyone explain me please why a high price is bad?
The purpose of Steem Dollars is to be a stable currency to be used for commerce. Having the price with high fluctuations does not serve that purpose.
And as the Steem ecosystem matures, it will become more difficult for speculators to manipulate the price.
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whoa - it's supposed to be used for commerce? that's fascinating. is anyone actually using it that way?
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That is helpful. All this time I have been burning money :)
Disclaimer: when SBD is worth less than $1, the convert button is actually the right thing to do.
I have no idea why the "convert" button is even available on steemit.com. It's a very advanced feature that is rarely a good idea, and is an especially bad idea now. :)
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Lol love the last picture (like a red button or a green button). Thanks for the pro tip, I did not know any of this, it is all good to learn.
Thanks, you've helped me understand SBD better, but now I'm trying to understand why anyone would want to buy SBD now when it is currently at $2.47 on coinmarketcap.com? You mentioned that when SBD is way above $1 then it doesn't work well for protecting profits which leaves me wondering what may be driving the price of SBD up? Could it be that some people don't realize how SBD works? It seems so illogical to me for anyone to drive the price of SBD up to $2.47 that it makes me wonder if I am missing something?
Yeah, it's wild. I think it's just caught up in the recent crypto insanity. Traders on the exchanges don't always seem to care much about fundamentals.
Great post, @biophil! I just sold all the SBD I had in my account for some Steem, which I will in turn power up :)
"you're failing to help the system print more SBD to drive the price down to where it should be"
who cares, isnt it better if its worth more?
It's better if STEEM is worth more, but the purpose of SBD is to have a constant purchasing power.
doesnt it only matter in one direction, meaning: if steem drops to less than $1, then having SBD saves you from that loss. But in the other direction, who cares? Like let's say you have 2x steem at $1, you turn it into SBD, which is trading for $1.50. Then Steem drops to $0.50. So...you can still get 2x steem for each SBD. Or you can sell each for $1.50...What's the downside?
Nah, price stability works in both directions. I'd like a safe harbor for crypto profits, but right now SBD isn't that because it has this huge downside due to trading at a premium.
I think you understand this better than I do - can you give me an example situation where having more expensive SBD would be bad?
Right now is a good example. With bitcoin booming, anybody who wants to protect their profits needs a place to put their money that won't lose value -- and SBD is generally supposed to fill that role. However, right now SBD is guaranteed to lose over a third of its value as it drifts back down towards the peg. So now one of the key use-cases for SBD is broken.
Ahhhhh. Got it. Thanks for the explanation!!
Or say Steem goes from $1 to $2. Having SBD during that transition is bad for you. If it's worth more than $1, it's not as bad.
Thanks a bunch @biophil. You have really done great opening our eyes to the truth. I will should be sell all my SBD for steem once i claim them.
@blocktrades get ready for some business with me.
If you're selling SBD for Steem, just use the internal market and avoid the Blocktrades fees.
Okay so how do I go about that?
See my image at the bottom of my article with the red and green boxes? Click the one that says "market" in the green box.
Thanks for sharing! A link to your post was included in the Steem.center wiki article about Steem Dollar (SBD). Thanks and good luck again!
Cool! Thanks!
Hi @biophil,
This is a fantastic post and critically important read.
When I first saw Steem Dollars (SBD) on coinmarketcap I could not undersand why it was so small as compared to Steem.
So it turns out people were burning SBD for over the last 1-2 years, probably most without knowing.
I made the mistake of using an exchange to convert SBD to Steem because I saw people doing so, and I realize now the rate is so much better with market.
My question is how is market managed? Is this part of the blockchain (can't be right...it's Steem no BitShares) or part of a feature Steemit Inc implemented?
Thanks for further elaboration.
100% Upvoted....don't know what this community will do without you @biophil!
You're a True Steemian At Heart!
Thanks for the note!
Actually, the Steem internal market and the external exchanges (OpenLedger, Polo, Bittrex, etc) will typically give you similar rates. The internal market is usually better if you're only exchanging a few hundred at a time (since it has no fees and you don't have to trade into BTC first), but it almost never has enough depth to do thousands.
What I didn't really mention in my article is that sometimes converting SBD is actually the right thing to do: when SBD is worth less than 1 USD, you'll make a profit by converting it. It's the exact opposite situation as now, when SBD is worth more than 1 USD and you make a loss by converting it. So yes, people have been converting for a long time, but some of those conversions were smart.
The market is part of the blockchain! The Steem blockchain has an internal, on-chain market that allows you to trade between SBD and STEEM totally trustlessly. Lots of blockchains have their own internal markets; they've been doing this for years. Counterparty was the first, then Nxt, then Bitshares, then tons more.
Anyway, thanks for dropping by and thanks for the encouragement. I hope my clarifications here help!
This is excellent advice! I sold all mine when the price spiked to $2.00 over the weekend. I've got a buy order just begging for that dip to happen! Let's make a dip! ;-)
Hay you had really explain very well why the price very and alll the relationship among various parameters...
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That was helpful. I was planning to sell anyhow:)
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Thank you @biophil for this information. I have never used the convert before. Still dont knkw what it's there for, but right now I thing it wont be of use to the community.
Thank you.
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This is the most useful article I have read...thanks for the information...for sure in future I will not be converting every day...Thank you...UPVOTED
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Hay you had really explained it welll about the demand and supply and how the regulation of price happen ...
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STOPPerhaps Steem developers should insert a small disclaimer next to the Convert button, advising that the market price for SBD can vary, and any conversion done is at the user's own risk. Perhaps the current market price can be displayed next to the button so users are aware that they can get a better price by selling their SBD.
I wish I could resteem this too. Thanks
What is missing for steem to be traded wider and broader, is more info on their business model and monetizing plans. Once ppl convinced on this they will rush cause the idea is great, they only need a sign of money making plan
Yawp! I've been very pleased to be selling SBD for months now! I only wish I had waited to sell until it hit that magnificent .14SBD:1STEEM rate that I managed to get a teensy bit in for.
I wonder how long this absurdity will last, and WHY?