How do merchants handle price volatility?

[netrin]

Despite the many advantages of bitcoin, they don't make pricing easy. If your operations are tied to a particular fiat currency (euro, dollars, peso...), how do you set your prices in bitcoin, last close, weighted average? And how much do you mark up prices as a hedge against inflation risk? Do you take other precautions?

From 8 June to 9 September, each bitcoin has lost about a dollar in value on average every three days. Over those three months (93 days), bitcoin has devalued 88%. The largest single day drop was 46% on the 11th of June and a 42% drop just last week. Certainly there have also been spectacular gains, but the seasonal trend has been down and the volatility risks great.

Despite this volatility, a merchant is in no way required to hold bitcoins. The value only needs to hold between setting a price and purchase. Any longer is market speculation. Do merchants hedge against 40% drops and for 2% daily inflation, perhaps marking prices up 22% ?

Code:

  Date   High-Low Devaluation
======   ======== ===========
11 Jun   24 - 13       45.83%
 6 Aug   10 - 5.7      43.00%
8-9 Sp   7.2- 4.2      41.66%
 1 May   4.1- 2.5      39.02%
 9 Sep   6.5- 4        38.46%
26 Aug   10 - 7.5      25.00%

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[nefanon]

I was just wondering the same thing, any insight?

[edd]

My primary motivation in starting BitBrew was to stimulate and encourage the bitcoin economy, which is why I have avoided raising or lowering my prices as much as possible. I've exchanged some for USD but I've also used them for advertising and other online related expenses. If I traded every bitcoin in my possession for dollars right now, BitBrew would not in any way be considered profitable - but what small business is in their first few months?

[netrin]

Well, I've just started posting products on this forum. For each item, I link to a post on Bitcoin Classified where the price is adjusted based on a daily weighted average. I was counting on worst reasonable case scenario is a 40% drop in a day. But since I'm ultimately long on bitcoins, I hedge 20%, hoping I'll gain once in a while.

Just today I cut prices to a loss to spur some activity on this sleeping forum, but if I intend to make a profit, it'll matter quite a bit. I might have to renegotiate a price by email just before offering a bitcoin receiving address. That's how it tends to work with all interpersonal trades I've made anyway.

Edd, what's your profitability price? I hope you didn't peg your prices in June! But, I've got a similar feeling. However, I can't take a material loss for too long. I thought I would set a reasonable margin and just slide with the weekly average.

[edd]

Edd, what's your profitability price?

Well, that depends. Do I factor in advertising and giveaways (which I do impulsively)? Should I take an average starting from day one when I was getting product at almost retail prices and shipping costs very nearly dissuaded me, before a salesperson from FedEx was kind enough to finally return my phone calls? (BTW, FedEx was the only carrier that I was able to establish some personal contact with, which won them my business.)

Honestly, if I was determined to become profitable ASAP, I'd double my BTC prices.

[evoorhees]

Use Bit-pay.com  and there is no exchange rate risk/volitility risk. Problem solved!

[netrin]

Bit-Pay looks promising, but I do not operate out of the United States, and do not yet have a web store front. So I failed to register on step 2 of 4. Anyway, how do they solve the issue of pricing - convert everything into dollars immediately?

[johnj]

Bit-Pay looks promising, but I do not operate out of the United States, and do not yet have a web store front. So I failed to register on step 2 of 4. Anyway, how do they solve the issue of pricing - convert everything into dollars immediately?

From their FAQ

How do I get paid?
Merchants can be paid in US Dollars, or in bitcoins, but not both. We can send the bitcoins to any address you choose. So if you prefer a mixture of some bitcoins and some dollars, you can have all bitcoins sent directly to your account at a trading exchange. From there, you can sell them or transfer them as you wish.

[Joseph]

Well, I've just started posting products on this forum. For each item, I link to a post on Bitcoin Classified where the price is adjusted based on a daily weighted average. I was counting on worst reasonable case scenario is a 40% drop in a day. But since I'm ultimately long on bitcoins, I hedge 20%, hoping I'll gain once in a while.

Netrin mailed me with the request to make the calculation on Bitcoin Classifieds a bit more clear. On Bitcoin Classsifieds it is possible to enter a price in USD or EUR and the correct Bitcoin price is adjusted every hour. It works as follows:

- Every hour this JSON file is automatically downloaded from Bitcoin Charts.com: http://bitcoincharts.com/t/weighted_prices.json .
- I then store the 24h values of USD and EUR.
- The prices in BTC are calculated when requesting an ad or viewing a page on Bitcoin Classifieds.
For more information how Bitcoin Charts generates these values, go to http://bitcoincharts.com/about/markets-api/

[netrin]

Thanks Joseph, I followed up with Bitcoincharts who clarified that the prices for each currency represented the volume weighted average price from all bitcoin markets trading that particular currency. At no time are fiat to fiat currencies compared (USD and EUR often diverge 10% from forex granting arbitrage opportunities). He added that:

Pricing in a volatile currency is very hard. If it's critical it might be a good idea to keep some coins at an exchange and sell them just-in-time, calculating their volume from the market depth.

[nmat]

Bit-Pay looks promising, but I do not operate out of the United States, and do not yet have a web store front. So I failed to register on step 2 of 4. Anyway, how do they solve the issue of pricing - convert everything into dollars immediately?

If you receive payments in bitcoins, you do not have to be in US.

[netrin]

If you receive payments in bitcoins, you do not have to be in US.

The Bit-Pay registration form does not seem to allow submission without an address in the US nor a website.

For my own particular purposes, I am content using an online wallet, exchange, or a local bitcoin client. I do not generally want USD nor EUR (personal speculation aside). My concern is the time arbitrage between advertising a price, request to purchase, payment received, and product shipment. I'm curious if other merchants mark up their prices (and how much), short the market, or negotiate a price just prior to shipment. I'm also curious how businesses operate and balance their accounts with highly inflating currencies, such as in Eritrea, Argentina, DR Congo, Venezuela today, or even hyperinflation such as Weimar Germany, Hungary or Zimbabwe.

[P4man]

Woha, Bit-pay looks like a fantastic idea. Im not sure if 2 graduates without VC backing will be able to make this work this early in the game,  but this could be big. Huge.

[netrin]

According to Cagen, hyperinflation is "inflation exceeding 50% a month." Over the three month period from when bitcoin traded at $32 on 8 June to a low $6.3 on 8 September, bitcoin depreciated 42% monthly, 12% weekly or 1.76% daily against the dollar. I suppose it could have been worse. In the past week, bitcoin has depreciated 3% to 5% daily, which put bitcoin squarely in Cagen's hyperinflation zone, at least for the week.

For what I'm selling, there's less than a week between posting a price, chatting with a customer, and receiving payment. It would be nice if as a merchant I don't have to renegotiate the price after the customer has decided to buy. So with a low profit margin, I think it's reasonable to inflate prices 12% above cost and float it against the daily VWAP. Thoughts?

Phillip Cagan, The Monetary Dynamics of Hyperinflation, in Milton Friedman (Editor), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press (1956).

[RealMusicShop]

I sounded out the German community on this topic asking if they would accept something like an inflated priceto cover the volatility risk. The answers were outraged!

They did not understand that it takes courage for us merchants to accept bitcoins.

[P4man]

They did not understand that it takes courage for us merchants to accept bitcoins.

Not if you use something like bit-pay, though I have no idea what their fees are. Perhaps you should find out.

[netrin]

Not if you use something like bit-pay, though I have no idea what their fees are. Perhaps you should find out.

I think what I am doing has the effect of bit-pay. I have my prices pegged to a stronger currency (euros,dollars) which fluctuates daily. It makes a mess of advertising, but at least I don't need to hedge against a week, only a day. While we've seen drops above 40% and many case above 20% single day falls, 2% has been typical since Spring.

It is a pity, but for now, I am afraid high inflation relegates bitcoin to an exchange protocol rather than a money (medium of exchange +1, store of value -1, unit of account ~1). In other words, Pay-pal without the centralization, but a measly fraction of the market.

...accept something like an inflated priceto cover the volatility risk. The answers were outraged!

"Ich würde eigentlich gar keine Gebühr akzeptieren."

Yeah, I can see that! My German is not hot, but the words are clear "I would accept no fee!". It's interesting to receive German/Austrian's (though not their grandparent's) perspective! It is no secret that 90 years ago, merchants in Berlin inflated their prices enormously and the farmers priced their produce out of the market. Before the French occupied the Ruhr, inflation was only a third of what we've seen the past three months in bitcoin. Customers were hoarding products of all kinds and spending their entire paychecks in a single day on anything that retained value. If only we were so lucky! Following the occupation the following years, however was a whole different catastrophic disaster.

"Du hättest eigentlich nur die Wechselgebühr deiner Börse in die Artikelpreise einzupflegen und die Artikelpreise dem BTC-Kurs entsprechend anzupassen. Ob täglich oder stündlich, bleibt dir überlassen."

Fortunately, we have no price controls nor prohibitions against foreign currencies. If I were profitable I suppose I would hedge for a day (2%) which is hardly worth calculating in.

[OgNasty]

I think it's reasonable to inflate prices 12%

I do not.

it takes courage for us merchants to accept bitcoins.

Yes.  The time it takes to exchange could work in your favor as well.

[the joint]

I think it's reasonable to inflate prices 12%

I do not.

it takes courage for us merchants to accept bitcoins.

Yes.  The time it takes to exchange could work in your favor as well.

If you're gambling you're not running a business.  Business is about profit.  Right now, paying a premium on BTC-related purchases is understandable.  You should expect to pay 10% extra, not 10% less.  That can change when you have 1.) a competitive economy and 2.) stability in volatility.  The name of the business game for now is fiat, not BTC.

[zer0]

as a merchant i cash out bitcoins i receive immediately to get near the exchange rate
9/10 times this has worked in my favor, never lost more than a few dollars

my typical orders are $700, so far all good