Bitcoin Forum

Suppose I want to sell roasted coffee, accepting payments in bitcoins.

My raw material is priced in USD.   Bitcoin to usd is pretty volatile, and I eventually have to pay for the commodity in USD, what is the best way to set the price in bitcoin?

The bottom line of any viable business is to survive and generate enough profit to grow.

Several options:
1) Set the price for a week, and charge a risk premium to reflect the risk.
2) Use 24 hour bitcoin/usd average to set the price, and convert bitcoin to usd at mtgox or tradehill the same day.
3) Accept bitcoin, and hedge bitcoins at campBX or Bitcoinca trading platform.  Essentially long bitcoins by accepting them and short at trading platform, a nearly delta neutral strategy.

Any other ideas?

I would think the usual business that encounters currency risk would use multiple strategies.

I suppose another strategy would be to have BTC and USD reserves to hedge against short-term (2-3 days) risk. That way, you would not be forced to convert BTC at a low USD price because you can wait a few days and pay expenses in the meantime from USD reserves. Conversely, you can convert more BTC than usual when the USD price is high and take advantage of upswings to add to the USD reserve.

Bit-pay? Providing prices in bitcoins, but keeping account in USD? There is, however, some fee on bitpay platform.

You didn't say if you are selling in a real shop or online? Depending on which (or both...) you should think that the goal for the customer is to get the cheapest price. So you can't ask a huge premium, or he will simply pay cash or use his credit card. You can add a small percentage to catch the small daily swings in the exchanges, but not much. How about the fees for using fiat?

Next, I believe you should decide for yourself if you believe usd/btc exchange rate will be stable, go up or down in a selected timeframe. I prefer to work on months, you might want weeks. Let's say you believe the rate will go up or be stable. Considering you won't have that much bitcoin volume in the beginning, I think you can simply take the risk of caching bitcoins for a full month and then selling for get usd.

It's been already mentioned - bit-pay. Do the math, it's possible they are the easy solution that you can also afford. Unless you're an expert in trading, I would avoid hedging with a margin trading service like bitcoinica, but I guess you could transfer the coins to an exchanger (daily? weekly?) and put some sell orders to stop losses in case the rate goes waay down. Just don't forget that too aggressive sell orders might get fulfilled too soon...

Oooooooor.... you can contact your suppliers and talk your way into paying with bitcoins! Then you send them here and then we'll answer them and so on :)

You set the price and include some risks in it, of course. However, the question is how you want to reduce the risk of BTC going down compared to USD.

In fact, exactly this problems drives my development of the derivatives market in the bitcoin (ICBIT, there is a thread about it in Projects Development area of the forum).

So when the derivatives market is open, you would do the following. You accept the payment for the coffee in bitcoins, say, you get 100 BTC for the coffee bag you sold. And you would need to pay 100 USD for this amount to your supplier.

As long as the rate is e.g. 2 USD per 1 BTC, you're doing good. But what if it goes to 0.5 USD per 1 BTC? You're screwed.

The solution. You buy 1 lot of the nearest USDBTC futures contract (which has a size of 100 USD) at the current price level (for exchange ratio 2 usd for 1 btc it would be around 50 BTC for 1 contract). Shortselling or buying the futures contract is a cheap operation, you just have to support the minimum maintenance margin available in your account (say, about 10% of the value, which would roughly be 5 BTC).

Now, you have: 100 BTC, 1 futures contract to hedge the risk for 100 USD you need to pay.
Imagine bitcoin rate went down (bitcoins are becoming cheaper) to 1 USD per 1 BTC. Futures price level would increase then to around 100 BTC for 1 contract, and you will get a positive variation margin in the derivatives market.

The "physical value" of the above is that the size of this variation margin transferred would be as much as it's needed to buy 100 USD on an exchange. So if the rate drops, you always have enough money to buy those 100 USD.

Of course, if the BTC value rises, variation margin will be subtracted, but since you own those 100 BTC, their value also increases, so in practice you don't loose anything.

A bit hard to explain in one topic post, but that's a classical hedging scheme, explained in every economic book out there :)