Vendors losing money in the bitcoin price drop? Learn to hedge here.

If you're a vendor you've probably been there. You've accepted a couple of orders, the bitcoins are held in escrow. Meanwhile, the bitcoin price drops and drops.

I just saw blueviking close his shop because of bitcoin price volatility. It doesn't have to be like this.

This is what you do to eliminate the effect of bitcoin price drops on your money stuck in escrow.

  1. Open an account on a bitcoin exchange which doesn't need ID verification (btc-e, bitfinex, kraken, okcoin, houbi) and send it some bitcoins.
  2. When an order comes in, sell the same amount of bitcoins on the exchange to get USD.
  3. When the escrow is released, use the USD to buy bitcoins at the current price.

Every couple of days or weeks, transfer bitcoins in and out of the exchange (aka rebalance) and sell them for normal currency in localbitcoins or whatever you normally do.

Upside: No more currency risk. No more worrying. Your business is selling drugs, not daytrading the bitcoin markets.

Downside: Have to have a reserve of bitcoins on exchanges equal to all your orders, the exchanges might charge about 0.2% per trade, you have to pay the bid-ask spread each trade (which is roughly another 0.2%) But I think this is worth it, in this recent big price drop I've heard of vendors losing thousands of dollars.

You can do this on almost any exchange except for bitstamp. Since you're just transferring in and out bitcoins not USD, you don't need to verify. That includes bitfinex and btc-e, the second and third largest USD exchanges. Plus tons of others. I bet loads of you vendors use fake ids anyway.


Comments


[13 Points] None:

+9


[7 Points] entactoBob:

Forgive my ignorance here, but how exactly is that a hedge? I believe there has to be a relationship between two investments, or as mentioned in another comment, you would need to be able to buy and sell futures/options/CFDs, or roughly, the right to purchase or sell a commodity at a "locked-in" price in the future. You have to be able to short one investment while going long on the other.

For those catching up… 
  1. Going long = guessing the value will go up, therefore buying now or buying the option to purchase at the current price. Example: you could buy a Ferrari for $100 grand, and if the value of it in 10 years goes to $140k, you sell for a cool $40k.
    OR »»» you buy a contract saying you can purchase a Ferrari at $100K no matter what the price goes to. In 10 years, that contract will be worth $40k and you can sell it to someone who wants to purchase an actual Ferrari.
  2. Going short = guessing the value will go down, therefore selling the contract now and buying it back for cheaper in the future when (you hope) the value has dropped so you profit on the difference.
    In our Ferrari example, that would be like buying the contract to purchase a Ferrari for $100k, selling it for $100k now, then buying it (either the contract or an actual Ferrari) for $60k when the price drops in the future and keeping that cool $40k.

Buying a stock & shorting its options is one way to minimize risk by offsetting potential losses and riding out the option until it becomes profitable or the loss is only marginal comparatively. Or the USD and the value of Gold (also crude oil) traditionally have moved in opposite directions, so there are ways of hedging your speculative bets there as well.


Breakdown (please criticize if you see flaws in my logic here)

You lost that $100 profit completely to the market.

You're still out $50 on the 1BTC you earned and another $50 on your "hedge" fund BTC too, are you not? The BTC price drop doesn't equate to any profit gain for you. You've still got your initial $600 investment in BTC, minus $300, so you still have $300 tied up, but it's now worth $250 and you only made a $50 profit instead of a $100 profit on the sale. Coupled with the loss of hedge value, you're just breaking even.

Good thing Substance D is legal or you'd be committing felonies for free!

Am I missing something here?

There is no way around it – you can't really minimize that risk just yet. While you can use CFDs and other forms of leverage, the market is still highly volatile and can be thrown into unpredictable patterns through technology failures and dramatic news announcements. Seriously. The BTC recently slipped massively in a matter of seconds thanks to a 26,000 BTC sell-off. That can easily lead to a ton of slippage that's hard to cover.

You have to be able to go long on one exchange and short with decent leverage in another…

Further:

Every couple of days or weeks, transfer bitcoins in and out of the exchange (aka rebalance) and sell them for normal currency in localbitcoins or whatever you normally do.

If you initially set this up at $300/BTC and then the price drops when you rebalance, how do you not eat that massive value drop? If the market didn't wildly jump around, it would be a minor offset, but then, you wouldn't been looking into hedging, leverage, & BTC arbitrage in the first place…


[5 Points] ciphersexual:

Nice post. I'll add that the same plan works for buyers.

Buy a seed bitcoin and hang on to it in an easily accessible wallet. When you make a purchase using some percent of the seed bitcoin, right after sending coins to the market escrow place an order for replacement bitcoins at the same rate as the droogs.


[6 Points] bullsonparade2487:

You're overlooking the volatility of the value of bitcoin between when it was transferred to the exchange and when its sold on the exchange. I like how you nonchalantly throw in "...and send it some bitcoins" in regards to the exchange account, but this is the exact step that nullifies any potential hedging; if the price of BTC drops youl still lose money because the BTC had a higher value when you transfered it to the exchange then when you sold it.


[2 Points] fibbleblock:

There is a far better solution than this, and that is BitSharesX asset BitUSD. There is a post in /r/BitcoinMarkets about it here that covers all the basics, and if you are a vendor or a market operator/owner, should make for very interesting reading.

Simply; what are the benefits?

In an ideal world, market operators will implement BitUSD alongside existing Bitcoin payment methods so that customers have the option of completing the entire purchasing cycle in BitUSD rather than BTC. Also, if BitUSD continues to be stable against the USD, the likelihood of getting upstream suppliers <insert favorite Cartel name here> to accept it increases. This would never happen with Bitcoin.

In the interim, vendors and/or market owners who want a decentralized secure way to store their earnings without trusting them to a third party and/or having to liquidate to fiat (and/or trust a third party exchange like BTC-E, Kraken or Bitstamp) can convert them to BitUSD until such time as the funds are required (E.g. for supply chain payments, entertainment etc).

It's basically Bitcoin 2.0

Questions and answers can be found on the https://bitsharestalk.org website

(*)The http://bitshares-x.info/ web-site has a list of normal exchanges for BTSX/BITUSD<->BTC on the about page as well as a link to the wiki with all the daemon commands etc.


[1 Points] DuCruu:

Hold up; where is BV currently vending??


[1 Points] youtakesally:

I thought the same but with CFD's. That way you don't even have to have a reserve of bitcoin. Just 'sell' CFD when you get bitcoin in escrow and finish it when you get the coins.


[1 Points] zee1000:

This is great advice.


[1 Points] 13tom13:

this should probably go in the important info section so its a permanent resource, i remeber sr1 had a hedging option maybe one of the current markets could do that


[1 Points] Vendor_BBMC:

Youve missed one important point. wheb the order cones in and you sell the equivalent dollar amount if bitcoin that you had in the exchange, THAT bitcoin has already lost value when bitcoins exchange rate is falling - EVEN IF YOU HAVE NOTHING IN ESCROW.

Escrow also GAINS vlue when bitcoin goes up.

Most of my business is done direct with customers I trust. As soon as I trust them I airlift them off darknet markets.

For the very first time this week, i had separate escrow and FE listings for every product. everybody has chosen FE listings (15% cheaper). Even a new customer.

I will ALWAYS offer escrow though. Its the only way for two anonymous parties to trade with confidence. customers on the darknet are very trustworthy. sometimes I Fe for THEM. "il send you it. Pay me if you want to. If you dont think its the best you ever hsd and dont pay me, nothing will happen. But I will be sad and you cant buy from me in the future".

Everyone has always paid retrospectively.