Silk Road forums

Discussion => Newbie discussion => Topic started by: Simplexity on March 07, 2013, 02:19 am

Title: BTC Volatility and Hedging?
Post by: Simplexity on March 07, 2013, 02:19 am
The current volatility of BTC value has gotten me to wonder about SR's hedging system.

I know there are many threads/posts regarding BTC value, hedging, etc. But looking through them has not answered my question (or maybe I'm just dense...):

Say, at time of purchase, 1 BTC = $1 USD and a vendor has pegged her product to the USD.
I purchase something that is listed for $1 USD, and so 1 BTC is taken from my account and gets put into escrow.
Now I understand that if the vendor did not hedge, that 1 BTC in escrow will be released to her regardless of how much 1 BTC is worth at time of finalization. However, if the vendor hedged, and the value of 1 BTC is cut in half (equaling $0.50 USD per BTC) at time of finalization, that means that the vendor would require 2 BTCs for the product now. Since there is only 1 BTC in escrow, where does the vendor get the other 1 BTC? Does it get taken out of my account? Or is this where the 4% hedging fee comes into play?

Hopefully that was coherent =)

Any help is appreciated!
Title: Re: BTC Volatility and Hedging?
Post by: ladyjane on March 23, 2013, 06:18 pm
Bumping because I have the same question and am struggling to understand hedging from my perspective as a buyer.

I've read the wiki and a bunch of threads, but just need a real life example that isn't about a refund but a purchase.
Title: Re: BTC Volatility and Hedging?
Post by: clmbs910 on March 23, 2013, 06:26 pm
Agreed. I'm still trying to figure it out too. I was under the impression that if the bitcoin dropped rapidly, the hedging isn't going to change that. If you agreed to pay 1 btc, you still pay that, meaning that dealers stand to lose money or increase profits based on how the market fluctuates? Was I wrong about that? Is that just something they tell us newbies to try to get us to FE so our price gets locked in?
Title: Re: BTC Volatility and Hedging?
Post by: Taklamak4n on March 23, 2013, 06:34 pm
If the vendor hedges, he receives the original dollar value (minus the cost of hedge). Whoever took the other side of the bet (the one providing hedging), took the loss. Over the long term the guy selling hedging services more than covers his losses throught that 4% hedging fee.

I don't know if things go like that in bitcoinland, but that's the way it goes in the financial markets.
Title: Re: BTC Volatility and Hedging?
Post by: Taklamak4n on March 23, 2013, 06:39 pm
To elaborate further (and get one notch closer to 50):
The buyer does not have to pay anything more. He already agreed on trade, and paid.
The seller does not have to pay anything more. He already purchased a hedge (at 4% of the trade value).
The one who sold that hedge, received 4%, but has to compensate the seller (trade price minus the current BTC market price). If BTC fell more than 4%, he's looking at a loss.
Title: Re: BTC Volatility and Hedging?
Post by: EarlyCuylerTOR on March 23, 2013, 06:54 pm
Good topic here, glad I stopped by.  So who is doing the hedging?  DPR? SR?
Title: Re: BTC Volatility and Hedging?
Post by: ladyjane on March 23, 2013, 07:24 pm
If a If a product is Unhedged, can it still be pegged to USD or is it then pegged to BC?

So for example...
If an order is Unhedged, and the price is 1 BC, i have to pay 1 BC whatever its worth. So if the 1 bitcoin is worth $20 when I finalise thats what the vendor gets, but if its worth $50 that's also what the vendor gets. Vendor gets 1 bitcoin if its worth $1 or $1000.  With this method the vendors adjust the bitcoin rate they are charging as they see fit. So if bitcoins are $100:1, they would reduce the bitcoin charge. But if bitcoins got to $10:1, they'd increase their bitcoin price.

But if an order is hedged, and it costs $50, I have to pay 1 bitcoin if the rate is $50:1 BTC - but if the rate is $25:1 BTC I pay 2 bitcoins.  And if I order and pay at 1 bitcoin = $50, and the value of bitcoins suddenly drops to $25:1, doesn’t matter because it's hedged and I have already paid the price it settled on at $50:1, and the person providing the hedged service (DPR/SR) covers that,. 

Is the above example correct? I am freaking struggling here.




Title: Re: BTC Volatility and Hedging?
Post by: ladyjane on March 23, 2013, 09:03 pm
bump
Title: Re: BTC Volatility and Hedging?
Post by: SRSuperfly on March 25, 2013, 12:49 am
If a If a product is Unhedged, can it still be pegged to USD or is it then pegged to BC?

So for example...
If an order is Unhedged, and the price is 1 BC, i have to pay 1 BC whatever its worth. So if the 1 bitcoin is worth $20 when I finalise thats what the vendor gets, but if its worth $50 that's also what the vendor gets. Vendor gets 1 bitcoin if its worth $1 or $1000.  With this method the vendors adjust the bitcoin rate they are charging as they see fit. So if bitcoins are $100:1, they would reduce the bitcoin charge. But if bitcoins got to $10:1, they'd increase their bitcoin price.

But if an order is hedged, and it costs $50, I have to pay 1 bitcoin if the rate is $50:1 BTC - but if the rate is $25:1 BTC I pay 2 bitcoins.  And if I order and pay at 1 bitcoin = $50, and the value of bitcoins suddenly drops to $25:1, doesn’t matter because it's hedged and I have already paid the price it settled on at $50:1, and the person providing the hedged service (DPR/SR) covers that,. 

Is the above example correct? I am freaking struggling here.

Pegging to the usd only effects the sale price, once the sale is made hedging in effects pegs it to the usd to the point of finalization. Your coin is still vulnerable from this point on (cash out).