Comment by patio11 | Hacker News Reader

Comment by patio11 | Hacker News Reader

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Do businesses that accept bitoins for payments typically immediately cash it out on exchanges or do they actually carry the "FX" risk?

People in the Bitcoin community believe that these options are mutually exclusive, but they're not. If you're doing a dual currency transaction in a period of high volatility, somebody is paying for that exchange risk. It's either the customer, the payment processor, or the merchant, or possibly two of them, but it certainly isn't no-one.

There were multiple periods today in which Bitcoin fell more than 10% in 15 minutes. If I were insane enough to sell Bingo Card Creator for Bitcoin, and then gave an elementary schoolteacher a quote for 0.42785714285714285714285714285714 BTC ($29.95 at 70 to the dollar), it's entirely possible that in the five minutes of thinking it took to process everything on the screen, the 0.42785714285714285714285714285714 BTC that I received would be worth only $27.81 at market prices. Hmm, that's funny, I just paid 7.1% in transaction fees before paying the transaction fees. (We're obviously operating in a perverse hypothetical world where elementary schoolteachers would both understand that option, have BTC available to spend, and be happy spending them, and where I would consider actually implementing this.)

It's possible that the payment processor I was working with would absorb this risk for me, because they hope to keep my business. That would be an extraordinary dangerous decision for them, because they're now running their merchant payments operation as a sideline to currency speculation. (Which I suppose makes them a perfect fit for the Bitcoin community.)

(I used to work at an investment bank working on algorithmic market making for currencies)

In theory how it would work is that your payment processor would get a price from an FX broker who would guarantee it for a fixed period of time (say 15 minutes) but would offer a worse FX spread with the difference between the offered spread and the market spread being their compensation for taking the risk.

The FX broker would mitigate some of their risk internally (against other customer who want to transact in the opposite direction) and through purchasing spot/forwards/options. As the volatility of the market increased the broker would widen their spread so as to avoid being over-exposed at any point. The business of the FX broker would fundamentally be one of risk-management.

So from a customer view point they'll get a crappy exchange rate compared to what they'd get from a BTC exchange, but they'll be able to do the transaction.

In reality this is quite similar to what happens in multi-currency transactions anyway, if you're buying something priced USD with a EUR credit card you'll typically:

1) Get a "frozen" rate (i.e. you'll get charged a specified amount of EUR) which is worse than market rate (as described above) .

2) Get charged the USD price at whatever the market rate is (-ish, there's still some markup on this) at the time the transaction goes through.

(some smaller vendors just have fixed prices in different currencies; this means that the vendors themselves are taking the currency risk)

And if you're selling something which can be resold for most of what you've been paid, then either you or your payment processor is giving away free puts on Bitcoin. And if you offer refunds at par value in USD, you're also giving away free calls on Bitcoin.

To play the devil's advocate, I'll point out that anyone selling in multiple currencies has to deal with hedging fx risk. For example, USDJPY has been pretty nuts thus far in April (not BTC nuts, but intraday swings of 1-2%).

If you were 1) very determined to sell in BTC and 2) could buy USDBTC options you could probably sell in BTC and limit your exposure to the fx risk.

I'll point out that anyone selling in multiple currencies has to deal with hedging fx risk

Yes, and anyone whose business involves juggling chainsaws has to pay an awful lot for workplace insurance, but Bingo Card Creator doesn't involve chainsaws. Bitcoin proponents love to say "No transaction fees! Can your credit card processor do that?" while perhaps forgetting to mention that the actual mechanism for achieving this involves you juggling chainsaws.

Transaction fees are part of the spec for bitcoin. Who says there are no transaction fees?

I'm not sure why you were downvoted. Bitcoin definitely has transaction fees which will only increase with time.

Yeah. I think at this "early" (from a mainstream PoV) stage, services like Coinbase and Bitpay are just simply another "VCs+founders betting" on how something might play out in the medium-term future. IF you have a few crashes like that in the short-term BUT Bitcoins "take off" and keep rising in USD in the medium-term, great profit opportunity. Because then, you get your 29.95 while the price has already risen far beyond that, with them pocketing the difference.

If it works out like that, neat play for them. If it doesn't -- "oh well, startups are risky". Fair game for teams that have such stamina. ;)

When it comes to BTC, right now, all bets are off.

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