Jump to content
Sign in to follow this  
drbubb

Bitcoin LOBs and GOBs : BTC Value Hedging concepts

Recommended Posts

Bitcoin LOBs and GOBs : BTC Value Hedging concepts

 

LOBs (Lesser-Of-Bets) / GOBs (Greater-Of-Bets)

 

77557882.png : btc1.png

 

 

( An idea under development - see the HEDGING NEED of Bitcoin Merchants described in Post #2 )

 

Presently, there is no effective way to "Hedge" the value of Bitcoins

 

Maybe something like this will work...

 

IDEA BEING FORMED :

(I developed Oil-Swaps, and I think I have a useful idea or two on Bitcoin hedging )

 

The following merely shows the format of ONE of two types of Bets: "LOBs" and "GOBs".

One side, a LOB allows a betting customer to Sell imbedded options, and the other side, a GOB, is a way to buy protection.

 

The sales Pitch: "LOB" a Bitcoin to us, and you will get back:

 

Either the specified number of BTC (per 1.00 Bitcoin bet), or the Dollar amount shown below:

 

LESSER-OF BETS : YOU GET OUR CHOICE

. . . . . At the end : (Indicative values only)

 

No.of / ( Expiry )

Coins / Jun. : Jul. : Compare US$

==== : Gets you :: You will get the lesser of Coins or USD

 

Per- :

1.00 / 1.20 : 1.25 : Coins, or $200,

1.00 / 1.30 : 1.35 : Coins, or $150,

1.00 / 1.42 : 1.48 : Coins, or $100,

1.00 / 1.60 : 1.75 : Coins, or $ 75 ,

1.00 / 1.80 : 1.95 : Coins, or $ 50 ,

 

=====

NOTE: I may want to "take this idea Private" at some stage -

At that stage, I will move the discussion into a special section, available only to those who have been accepted into the discussion.

Please let me know if you want to participate

=====

 

/How to Accept: http://www.howtoacceptbitcoin.com/

Share this post


Link to post
Share on other sites

"HEDGING NEEDED" - therein lies a business opportunity

 

The Hedging side requires a different sort of bet, a "GOB" / Greater-Of-Bet

I will develop that after explaining the LOB in more detail first.

 

18054936.png

 

BITCOIN MERCHANTS - How are they reacting to the Sharp price drop?

(When Bitcoin falls):

When prices of BTC falls, there can be a real problem. Suppose Bitcoin falls to $100, and a merchant receives 0.5 BTC, he will get only $50 worth of Bitcoins for his "$100 product." If his cost of production is above that, then he will loses money on every sale. How long can he stay in business losing money? Not long perhaps, so he will have to raise the Bitcoin price of his product fairly quickly, or stop selling in Bitcoins at all.

 

(I wonder which of these actions Bitcoin merchants are takIng with the present highly volatile BTC price gyrations?.)

 

Most seem to be sticking to their BTC prices - But I reckon that merchants will be sellers of BTC whenever prices rally,

After seeing the huge volatility, they may want to hold fewer coins, and will be sellers until they have their risk levels down

to levels that they can be comfortable with. Thus, we may see some prolonged selling from "trapped" merchants.

 

The following article suggests as much:

 

 

Bitcoin fans put brave face on price fall

Bitcoin halved in value on other exchanges after Mt Gox posted a message on its website saying: “Orders will not be accepted for the moment as we need to upgrade our database to accommodate the trading volume.”

 

The question now is whether merchants and Bitcoin users abandon the nascent economy because of the volatility.

 

Jon Matonis, secretary of the Bitcoin Foundation, which guards the open-source software behind the currency, said derivative products and hedging tools will be needed to stabilise the Bitcoin economy and to improve price discovery and the liquidity of exchanges where Bitcoin can be swapped for real-world currency.

 

“The amount that is traded on the various exchanges doesn’t represent a lot of the Bitcoins outstanding,” Mr Matonis said. “Even a 1 Bitcoin trade can move the price.”

 

Jennifer Longson, whose Cups and Cakes Bakery in San Francisco boasted of being the first cupcake shop to accept Bitcoins last October, is sticking by the currency. It represents a tiny proportion of her business - she makes Bitcoin sales at a rate of four a week, usually to “tech-oriented guys in their 20s and 30s” – and she has never cashed in the Bitcoins.

 

“I am definitely still up on the deal,” she said, “but I don’t consider that as part of my income because it is so volatile.”

===

http://www.ft.com/in...l#axzz2QNFKOKyQ

Share this post


Link to post
Share on other sites

Coins/ Jun. : Jul. : Compare US$

==== : Gets you :

1.00 / 1.42 : 1.48 : Coins, or $100

 

TO EXPLAIN: How the LOB / Less-Of Bet actually does work:

 

Let's take the case of the Bitcoin trader who is convinced that Bitcoins will stay in a trading range, and does not mind taking some risk with his Bitcoins.

 

He agrees to risk his 10 BTC in a LOB Betting arrangement and then wait, to see what happens.

 

(1)

ASSUME: He has wagered his 10 Coins in a June Bet, with a $100 Strike Price, as shown above.

At the end of June when the contract matures, he will get back into his account, either:

 

+ 14.2 BTC, being 10 x 1.42, or

+ 10 x $100 = $1,000

 

The Betting Company offering this bet, will give him back whatever then has LESSER value, since it is their choice.

So:

+ If the Bitcoin price is at more than $100, he will get the $1,000.

+ If the Bitcoin price is at less than $100, he will get the 14.2 BTC's.

 

In effect, he has sold a Bitcoin June Call option, with a strike price of $100.

 

If the Bitcoin is at just under $100 when he makes the bet, and it is back there at maturity. he is much better off.

If the price starts and ends at the same level, and he gets the coins, he will have increased his stake by 42%!

 

IN THIS EXAMPLE:

The Bitcoin holder doing the wager is taking the risk that prices will push higher, and he will lose his 10 coins.

But he is rewarded by a larger number.

 

Assuming the initial was price was $100, and it ends between $70.42 (100/ 142) and $100, the he will be better off having done the LOB Bet, than if he had done nothing at all.

 

A Bitcoin Holder, who does not like that range, may want to agree a different Bet, such as:

 

Coins/ Jun. : Jul. : Compare US$

==== : Gets you :

1.00 / 1.30 : 1.35 : Coins, or $150

 

(2)

ASSUME: He has wagered his 10 Coins in a July Bet, with a $150 Strike Price, as shown above.

At the end of July when the contract matures, he will get back into his account, either:

 

+ 13.5 BTC, being 10 x 1.35, or

+ 10 x $100 = $1,000

 

In effect, he has sold a Bitcoin July Call option, with a strike price of $150.

Share this post


Link to post
Share on other sites

I just found this https://icbit.se/ Bitcoin Derivatives Market and Exchange - Futures

and http://mpex.co/ Mircea Popescu Exchange (Futures and options)

 

Whatever next.

 

They seem to be non-operational...

 

Either stale information, or prices that are so broad that they have no use

 

EXAMPLE: MPEX

 

O.USD.C023T : Bid: 0.33587181 / Offer: 1.37865420

Share this post


Link to post
Share on other sites

=====

NOTE: I may want to "take this idea private" at some stage -

At that stage, I will move the discussion into a special section, available only to those who have been accepted into the discussion.

Please let me know if you want to participate

Greetings. Having followed BTC since the off, buying a small number as an experiment last year (I do techie stuff so interested to see the code and mechanisms) and then selling them at the high for around 6x their initial cost to me, I'm very interested in following this topic, please. I shall contribute where I can.

 

Please note my initial "investment" was very low (less than half a dozen BTC!!! I'm not your traditional FOREX trader lol - yet! - but that's what this profit felt like). Also interested from the political and cultural standpoint. Saw Max Kaiser at the weekend declaring that BTC will hit 1000 USD (but I didn't notice by when... plus he's a vested interest, but he's good fun :))

Share this post


Link to post
Share on other sites

Greetings. Having followed BTC since the off, buying a small number as an experiment last year (I do techie stuff so interested to see the code and mechanisms) and then selling them at the high for around 6x their initial cost to me,

 

I'm very interested in following this topic, please. I shall contribute where I can.

 

Okay. Thanks for the supportive comments.

 

I am thinking of a small start-up business, which I would intend to fund through Bitcoins (and retain the working capital in the same form.)

 

The new business might have two main Missions:

 

1 / To provide a means for people to exchange Bitcoins directly in HK$ and back. Later we might add an Rmb exchange.

 

2 / To provide Hedging instruments for Bitcoin Merchants, concerning volatility.

 

Mission #2 would solve the "Bitcoin Merchant's volatility problem", which I describe as follows :

=========

 

A Merchant who sells goods priced in Bitcoins has a special problem: coping with a huge amount of volatility in the Bitcoin price. Unless he/she is lucky enough to have costs which are also denominated in Bitcoins, the gyrations in the exchange rate into US$ (or whatever his base currency is) will mean the PROFIT MARGIN is very difficult to predict.

 

Most normal businesses might have a Gross Profit Margin of 10-20%, if they are lucky. Bitcoins can easily move this much in a single day, or even more than that. A merchant might cope with this by changing the price of his product. But this can be a special burden, and may take more than one price change per day. And alternative might be to purchase a Bitcoin hedge which will allow the merchant to predict the US$ value or HK$ value of his Bitcoins.

 

To provide balance in the business, I intend to also offer instruments where those who have Dollars or Bitcoins that they are holding, can gain the chance to increase their holdings by giving selling a conversion option to the Hedging company. The tentative name that I have for these instruments are LOBs and LODs, where:

 

+ A LOB: is a Lesser of Bitcoins (LOB) or US$ - where the Bettor hands over Bitcoins for a fixed period, and at the end will get back either a Larger number of Bitcoins, or a pre-agreed US$ amount.

 

+ A LOD: is a Lesser of Dollars (LOD) or Bitcoins - where the Bettor hands over US Dollars (or maybe HK Dollars) for a fixed period, and at the end will get back either a larger amount of Dollars, or a pre-agreed Bitcoin amount. (The choice is given to the Betting company, so the lessor of the two is what will be handed back.)

 

EXAMPLES TO FOLLOW.

 

The company will start with these two instruments, where it is, in effect, buying options from its clients. Other Hedging instruments will be added later, once the Company has demonstrated to its shareholders that it can manage the risk in buying options. The expected new instruments will give the clients the right to choose the GREATER of two amounts, and will be called GOBs and GODs.

== ==

 

TI,

I won't be sharing actual computer code that we might right, since that would be proprietary to the company. The idea is my own, and so I feel it is something that I am willing to share in this public forum, in the hope that I might get some useful feedback and suggestions to improve the basic business model.

Share this post


Link to post
Share on other sites

2 / To provide Hedging instruments for Bitcoin Merchants.

 

Mission #2 would solve the "Bitcoin Merchant problem", which I describe as follows :

=========

 

A Merchant who sells goods priced in Bitcoins has a special problem: coping with a huge amount of volatility in the Bitcoin price. Unless he/she is lucky enough to have costs which are also denominated in Bitcoins, the gyrations in the exchange rate into US$ (or whatever his base currency is) will mean the PROFIT MARGIN is very difficult to predict.

 

Most normal businesses might have a Gross Profit Margin of 10-20%, if they are lucky. Bitcoins can easily move this much in a single day, or even more than that. A merchant might cope with this by changing the price of his product. But this can be a special burden, and may take more than one price change per day. And alternative might be to purchase a Bitcoin hedge which will allow the merchant to predict the US$ value or HK$ value of his Bitcoins.

 

 

Erm...

https://bitpay.com/

Share this post


Link to post
Share on other sites

 

I looked at the site, but I could not see how the solve the Bitcoin-volatility-problem for the Merchant.

Do they have a mechanism to change prices?

 

I certainly did not see any instrument for BTC-price-hedging

 

BTW, for online publishers this may be less of a problem, since their Cost of Sales are close to zero, and

Gross Profit Margins are near 100%

 

(in edit : I found this video)

 

http://www.youtube.com/watch?v=iDFt5sslE7o

Share this post


Link to post
Share on other sites

Am I missing something, or are most Bitcoin Service providers a big bunch of Bozos?

 

2010-09-24-bozos.jpg

 

Looking on the web, I found sites like the following one, which claims:

"solves nearly every problem that exists with the Bitcoin currency"

 

... and then they go on to explain, and enumerate:

 

 

How F---coin Solves Bitcoin’s Problems

 

F---coin solves nearly every problem that exists with the Bitcoin currency today.

 

1 – F---coin solves the mobility problem

Currently, the bitcoin client (and the coins sent/received by it) are limited to the device it is initially installed on. This means that if your bitcoins are stored on your work PC, you can’t easily access them from home. Flexcoin allows for a smartphone or any internet connected device to act as your bitcoin wallet. Thus, your smartphone just became a “bitcoin debit card” of sorts. As of October 2011, Flexcoin QR support was added, making a dramatic jump in ease of use for mobile devices.

 

2 – F---coin solves the “coffee shop” problem

If someone wants to buy a cup of coffee with bitcoins rather than flexcoins, transactions can take anywhere from a few minutes to a few days (if sent very low priority with no fees) to complete. This means that either the merchant has to trust that he will actually receive his coins (not feasible), or you will need to wait in the store until the coins actually transfer (also likely not feasible). Flexcoin solves this problem with instant transfers: sending coins to another flexcoin ID is instantaneous. There’s no waiting period: you press send, and seconds later the coins are in the other user’s account. Any merchant that can’t wait three days to get paid for a cup of coffee (or any other goods or services) should consider accepting flexcoins as a form of payment.

 

3 – F---coin solves the transaction fee problem

All flexcoin to flexcoin transfers are 100% free. Flexcoin only imposes a fee on transfer out, all incoming transfers and transfers between flexcoin users incur no transaction fees whatsoever (although we do recommend that you include a fee yourself on your inbound transfer, to ensure that your coins get into your flexcoin account quickly).

then: 4, 5, 6...

===

/more: http://www.flexcoin.com/103.html

 

Some Good features, but...

They don't even mention the main problem: of Bitcoin price volatility - why Not ?

Do they really think this problem does not matter?

(What a bunch of clowns! Or have I missed something?)

Share this post


Link to post
Share on other sites

This Bloomberg article is better (on the Bitcoin Merchant's price hedge problem):

 

TMN-US-Currency-620.jpg

 

Merchants who use Bitpay generally set prices in dollars or euros. Bitpay then converts that to a price in Bitcoins.

One striking part of this process: Gallippi’s company guarantees a dollar or euro to Bitcoin conversion rate … for 15 minutes. Yes, 15 minutes. That’s what pricing is like when you’re talking about a currency that fluctuates in value the way that Bitcoin does. If you want to know what you can buy tomorrow for the Bitcoins you have stored today, forget about it. Your two Bitcoins might be enough to buy a cheap laptop today, and maybe a powerful computer next week … or maybe just a box of cookies.

===

/more: http://go.bloomberg....d-now-crashing/

 

SO, there you have it!

The Bitcoin merchants in this article are NOT ACCEPTING BITCOINS, not really, they are merely offering a Bitcoin conversion mechanism.

That is a very different thing !

Share this post


Link to post
Share on other sites

March 7, 2013

 

Eliminate Bitcoin Volatility Risk with BitPay

 

One of the important features of BitPay's bitcoin payment processing platform is BitPay's ability to guarantee the exchange rate to our merchants on every order processed. Meaning, if a merchant asks BitPay to collect $150, as long as the buyer sends the payment within the time window, BitPay guarantees the merchant will receive exactly $150 minus our fee.

 

This feature has been a benchmark in BitPay's platform since its inception and launch in July 2011, but on days where the bitcoin price is more volatile, this feature is extremely important. For some merchants operating on thin margins, it may be the most important feature when evaluating payment processors.

 

amagi640.png AmagiMetals.com website

Amagi Metals is a precious metals dealer in New York which began accepting bitcoin payments in 2012. Amagi initially started with a different bitcoin payment processor that offered lower fees, but quickly switched to BitPay because the first processor could not work as expected.

. . .

In addition, BitPay's platform offers merchants the reporting their accountants need, where the gross sales, processing fees, and net sales are all cleanly reported in the merchant's local currency. This offers a tremendous time savings for accountants trying to reconcile and record the revenue received over the bitcoin network.

===

/more: http://www.howtoacceptbitcoin.com/

Share this post


Link to post
Share on other sites

Interesting concept. But it may take a while to iron out the bugs.

 

(1)

ASSUME: He has wagered his 10 Coins in a June Bet, with a $100 Strike Price, as shown above.

At the end of June when the contract matures, he will get back into his account, either:

 

+ 14.2 BTC, being 10 x 1.42, or

+ 10 x $100 = $1,000

 

The Betting Company offering this bet, will give him back whatever then has LESSER value, since it is their choice.

So:

+ If the Bitcoin price is at more than $100, he will get the $1,000.

+ If the Bitcoin price is at less than $100, he will get the 14.2 BTC's.

 

I think you have a problem here:

 

+ 14.2 BTC, being 10 x 1.42, ... 14.2 x $100 = $1,420

+ 10 x $100 = $1,000

 

At $90, then 14.2 x $90 = $1,278

 

And as the customer, I would rather have the 14.2 Bitcoins, so which one is it?

 

and,,, THIS sounds like a great advantage of the Coins:

 

"We have to spend an hour being a private detective on every international sale," says Josh Harvey. "We need to contact the buyer, ask them who is their employer, what is their address history, what is this purchase for. We need to do our own research to assess the risk whether this is a scam or not. I honestly don't know what we are paying Visa for, when we have to do all the work."

 

 

sn-flrnc-prod.jpg

 

StompRomp began accepting payments in bitcoin in 2012 when they learned how bitcoin can eliminate the risk of payment fraud.

 

Bitcoin is designed from the ground up as an internet currency, and operates completely peer-to-peer. The breadth and size of the bitcoin network makes it extremely difficult to commit a fraudulent payment.

 

StompRomp uses the Magento shopping cart platform with a bitcoin payment plugin designed by BitPay. The BitPay plugin allows StompRomp to collect a bitcoin payment without writing any code.

Share this post


Link to post
Share on other sites

I think you have a problem here:

 

+ 14.2 BTC, being 10 x 1.42, ... 14.2 x $100 = $1,420

+ 10 x $100 = $1,000

At $90, then 14.2 x $90 = $1,278

 

And as the customer, I would rather have the 14.2 Bitcoins, so which one is it?

Whoops!

You are right, of course !

I need to re-run my calculations

== ==

 

Many Bitcoin Merchants are using the English language poorly - when they say "we accept Bitcoins" !

 

The Bitcoin merchants in this article are NOT ACCEPTING BITCOINS, not really,

they are merely offering a Bitcoin conversion mechanism.

That is a very different thing !

 

CHATTER / Amongst website owners interested in Bitcoin payments:

 

Just a suggestion, but you might want to use btc for the price instead of fiat.

I can see how that would lead someone to believe that you accept fiat.

 

Isokivi 2 points 1 day ago

===

I am well aware of this problem, but the techincal solutions available to me atm. do not support it. As I am not interested in rising my prices by 1% just to use bitpay to accept bitcoin.

 

GrammerFacist 3 points 1 day ago

===

I see. Could you maybe use an exchange's api to just convert it yourself? I am not all too familiar with the backend of web design, so please forgive me if that's not possible.

 

Isokivi 1 point 1 day ago

===

I'm propably worse off when it comes to backend web design, which is why I use an existing easy solution and whatever modules exist for it. Should some starving prestashop developer see this here's one customer.

 

011010110 1 point 1 day ago

===

how easy is it to set up one of those sites. ? what sort of costs do you have per month?

 

Isokivi 1 point 1 day ago

===

Fairly easy, took me a week and I hadnt built a site in seventeen years. My monthly costs are limited to hosting, so not much. Not much at all.

===

/see: http://www.reddit.co...w_much_of_your/

Share this post


Link to post
Share on other sites

BTW, Max Keiser is apparently going to launch a new Bitcoin exchange (according to that Youtube vid above) with market making features (that is, the exchange smooths out prices). I'm assuming this may be UK based, but he doesn't say.

 

As someone who has had to contend with international transfers, several day waits etc to buy Bitcoins from more Bitcoin friendly regions, this news would be welcomed. The UK banks don't seem to like the competition!

 

Interesting.

I am considering a project here in Hong Kong, to allow a combined: Wallet, Exchange, and Hedging arena for Bitcoins.

 

We would probably focus mainly on HK$ related exchanges, but if that goes well, we may branch out.

 

The idea is now in a very early stage, and we are mainly still brainstorming about the best approach.

Share this post


Link to post
Share on other sites

The Bitcoin merchants in this article are NOT ACCEPTING BITCOINS, not really,

they are merely offering a Bitcoin conversion mechanism.

That is a very different thing !

 

Good thread. I'll share my thoughts when I have a few mins.

 

I just wanted to highlight the above though. From the buyer's perspective, they are accepting Bitcoin. What the seller does with them (or a 3rd party collecting them on their behalf) is of little concern to the buyer; they have fulfilled their part of the deal by providing the Bitcoins.

 

IMO, it's a bit like saying companies don't accept GBP if they go through a payment gateway (e.g. SagePay, PayPal etc). That is, the deal between the payment gateway and the merchant is also of no concern to the buyer. They just pay the payment gateway organisation and then expect the goods to be delivered.

 

[EDIT: Ofc, the price fluctuations due to the conversion is very important to the would be buyer though.]

Share this post


Link to post
Share on other sites

[/background][/size][/font][/color]

I just wanted to highlight the above though. From the buyer's perspective, they are accepting Bitcoin. What the seller does with them (or a 3rd party collecting them on their behalf) is of little concern to the buyer; they have fulfilled their part of the deal by providing the Bitcoins.

 

IMO, it's a bit like saying companies don't accept GBP if they go through a payment gateway (e.g. SagePay, PayPal etc). That is, the deal between the payment gateway and the merchant is also of no concern to the buyer. They just pay the payment gateway organisation and then expect the goods to be delivered.

 

You are right, of course: The Buyer does not care.

EXCEPT:

The price on offer to the Buyer will gyrate plenty - as the exchange rate varies.

Thus, the purchasing power of his Bitcoins could be wildly different from one day to the next,

highlighting the fact that they are not truly a store of wealth.

 

At this stage, few may care. But that may change someday, and I may want to be part of that change.

Share this post


Link to post
Share on other sites

MY REPLY #1:

(in response to an email about Bitcoins business opportunities):

 

== QUOTE ==

 

I think you've got something wrong there,

Only 25 BTC are created every 10 minutes on the entire planet,

and the number will be cut in half every 4 years - this will restrict supply over time.

 

DEMAND depends upon how many people know about them, want to use them, hold some "wealth" in this form, and the number of ways they they can spend them. In recent weeks, as BTC prices shot up, so did awareness, and the number of people set up to hold them.

 

After a severe price correction, I think there is likely to be another price surge, and there may be many cycles of price rises and falls. I would hope that price volatility would damp down over time.

 

The Wallet-Exchange-Betting business that envision would be expected to generate income (mainly in BTC) if its services are used. It would not be "underground" in any sense. Nor would it sell anything illegal.

 

Once it is profitable, the BTC value of its shares might show some considerable growth. I don't think there is much competition in Hong kong yet, because I suppose if there were, you would have heard about it.

 

Thanks for the comments. Let's keep some communication going about it.

 

I will add my side of this email to this thread:

xx

 

The thread will be "taken private" if/when the business idea is taken towards actual development.

 

BTW, This regular report on Bitcoins, the BitcoinReport, might be worth a look from time-to-time:

 

Is BTC Finished?

 

"Brother John F" says No, it will hit $300 in the summer, according to him.

 

 

== UNQUOTE ==

Share this post


Link to post
Share on other sites

From the

, I added the comments (in green): ... Bitcoin price update

 

bitcoint2.png

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×