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December 28, 2013, 08:47:41 AM |
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My first post here, btw. I tried searching to see if this idea had been proposed but to no avail.
Problem: Some retailers and merchants scared to transact in BTC due to volatility.
Many retailers would likely be willing to transact in BTC but they fear being left holding the bag, so to speak. Retailers place orders for their merchandise in the local or global fiat currencies. They also pay their taxes, employees, R&D, etc., in those same currencies. That ties them to the exchange rate between fiat and BTC. It can be difficult to pay $700 for some piece of merchandise and then try to sell that merchandise in BTC only to see a major correction possibly wipe out their profit on that transaction.
Scenario: Merchant unprotected against loss of value in BTC
A contract is offered to retailers by a Company seeking to sell protection against volatility and erosion of Bitcoin's value. The company analyzes the retailer's day to day business volume and determines that the retailer is likely to hold at most 10 BTC in their wallet at any given time. The unprotected retailer has a maximum risk of loss of $10,000 if BTC were to become worthless in that case. Company offers protection (insurance) against such losses by guaranteeing to buy their bitcoin at a specified price at a specified time. Company charges a fee for this service and retailer can offset this fee by pricing their goods and services to account for this additional business expense. An example fee would be $1,000 for up to 10BTC of buyback protection for a period of 6 months. Retailer can renew this contract policy after 6 months.
Solution: The policy functions similar to a put option where a buyer of a put contract has the right to sell the underlying stock at the strike price at the end of the contract but does not have the obligation to do so. In this case, the Company will be the one with the obligation to buy the BTC at the end of the contract. This would likely only occur if BTC declined in value below the buyback price at the end of the contract, otherwise the retailer would be better off using exchanges if BTC is trading higher than the buyback price. I would suggest that the policy be non-transferable. Also, redemption would be limited to the end of the contract on a pre-determined settlement date. This means contract lengths would have to vary according to the desired liquidity of the retailer. If a retailer can hold those coins for a year during a down market, they might desire a 12 month policy but if they need more immediate ability to sell their coins, shorter term policies would be a possible option.
Benefits: This idea protects the retailer from loss of value in BTCs, thus allowing him to price his merchandise knowing that he has a minimum redemption value on any coins he takes in from transactions. In the above scenario, an unprotected retailer would have to adjust the BTC price of his merchandise if BTC lost value. If BTC suddenly went down to $500 in the above scenario, he would have to double the BTC price of his merchandise to stay on par with fiat currency. On the other hand, if BTC went above $1000 in that scenario, the retailer can offer a sale on his merchandise for those customers paying with BTC since he will make extra revenue from the exchange rates. The benefits to the Company offering the policy is that for as long as BTC keeps gaining in value, redemption will be unlikely to occur, keeping losses to a minimum while earning profits from policy premiums. If BTC is on a long downtrend, premiums will have to adjust according to risk. The public in general benefits from more retailers accepting BTC as a result of having protection against loss of value of BTC. Also, with more retailers accepting BTC as a result, the demand for BTC is likely to increase, benefiting investors and those holding BTC for the long term. It may also smooth out volatility to a minor degree if protected merchants don't have to worry about panic selling their BTC holdings.
Implementation: I'm a fan of competition as it keeps prices down and companies more honest. I would like to see some startups run with such an idea with their own improvements, offerings, etc. If no individuals or companies exist or jump on this idea, another way to implement this would be to crowdsource funding for this project. Because the Company would have to pay out in fiat currency, it would be best if they had liquid assets in that form or possibly some form of bonding. Whatever redemption price the Company sets on it's policies, it would be best to convert BTC assets to the currency described in the policy during periods of higher BTC value. In the above scenario, again assuming $1000/BTC, if the Company had multiple policies issued with 100BTC at risk for redemption, they could sell BTC holdings if BTC went above $1,000. Assuming the Company had BTC assets exceeding that 100BTC redemption risk, they could choose to exchange a portion of those assets at ideal times. So, if BTC suddenly went to $1,200/BTC, Company could sell 100BTC at the $1,200 price, thereby assuring that they make an additional $200/BTC against all redemption that occurs at contract expiration. This would eliminate the risk out of the currently issued policies. However, I suspect that the Company may only want to exchange a portion of their BTC holdings depending on the state of the market. Policies could be varying term lengths, have a premium that is based on the number of redeemable BTC, and redemption prices could be below/at/above current market rate with adjusted premiums.
I'm open to feedback and suggestions/improvements on this idea as well.
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