Effect of SR "hedging" mechanism on bitcoin price?

[eldentyrell_old]

I know it's quasi-taboo to discuss SR here, so let me just summarize the relevant facts (none of which involve anything illegal) and try to focus on the economic question here:

* There is a website called "SR" which is currently the major (only?) "killer app" for bitcoin -- probably the one thing the average person might want to use bitcoins for, and for which there is no alternative to bitcoin.

* I believe "SR" to be the only major source of demand for bitcoins aside from speculation.

* In the last month or so "SR" implemented a "hedging" mechanism whereby transactions are now priced in USD and bitcoin are used only as a clearing mechanism.

Before the hedging mechanism was in place, sellers were exposed to fluctuations in the USD/BTC price from the moment the purchase was made until the time the buyer confirmed receipt of the goods -- rarely less than a week.  There was essentially no way for sellers to reduce this exposure.

With the new "hedging" mechanism the "SR" site absorbs the risk during this time period in exchange for a small fee.

I contend that sellers are now tempted to try to reduce their USD/BTC exposure to zero, because it is now possible (previously it was impossible).  This means they sell their BTC as quickly as possible after being paid.  This could make the difference between a few days of exposure or a few hours of exposure, whereas previously the seller was exposed for at least a week (or more) no matter what, so an extra day of exposure wouldn't make a huge difference.

Net result: people performing actual, real-world transactions in BTC are no longer holding it for very long.

Consequence: far fewer people are holding BTC for any appreciable amount of time, and the only ones who are doing so are the speculators (like 'em or hate 'em, it would be better to have more diversity here).

Thoughts?

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[Revalin]

This is closely related to something I was talking about recently:  https://bitcointalk.org/index.php?topic=42514.msg579016#msg579016

I absolutely agree that the average hold time strongly affects the fundamental price floor.

However, I think that this change on SR isn't going to cause a market shakeup.  Right now the price is divorced from fundamentals, and it's driven mostly by speculation.  I'm also not sure that SR is that large a percentage of BTC commerce: I suspect their average transaction is pretty small.  Are they moving that much volume?  Donations (particularly WikiLeaks) are another "killer app" for Bitcoin, and there are a bunch of IT guys moonlighting for BTC as well.  That could move a lot of coins.

That said, the SR hedge feature may matter in a way you overlooked:  SR probably hedges the escrowed funds - either by selling short on Bitcoinica to hedge their net position, or directly selling the escrowed coins and buying them back to deliver to the merchant.  (Hopefully they've considered the privacy implications.)  Do you know if they're doing something like that?  If so, the net hold time didn't just go from 8 days to 7, it went from 8 days to probably less than 1.

[eldentyrell_old]

I'm also not sure that SR is that large a percentage of BTC commerce: I suspect their average transaction is pretty small.  Are they moving that much volume?

Well, no, but I sort of don't think anybody else is either.   Or rather, they're moving a lot of volume compared to the rest of the bitcoin-for-actual-commerce world, but still very little.

Donations (particularly WikiLeaks) are another "killer app" for Bitcoin,

Ah, very good point, I had missed that!

and there are a bunch of IT guys moonlighting for BTC as well.  That could move a lot of coins.

Hrm, really?  I mean, I know there are a lot of people offering to moonlight for BTC.  I actually tried doing that and found it far less productive than just going to Craigslist and mailing checks back and forth.  But I guess that's because I'm in the same country as my clients.

or directly selling the escrowed coins and buying them back to deliver to the merchant.  (Hopefully they've considered the privacy implications.)  Do you know if they're doing something like that?  If so, the net hold time didn't just go from 8 days to 7, it went from 8 days to probably less than 1.

Holy cow, they probably are.  I hadn't thought of that.  They definitely started offering the service before Bitcoinica was up and running, so that's probably how they were doing it at least at first.

[eldentyrell_old]

Hrm, really?  I mean, I know there are a lot of people offering to moonlight for BTC.  I actually tried doing that and found it far less productive than just going to Craigslist and mailing checks back and forth.  But I guess that's because I'm in the same country as my clients.

Sorry, "productive" probably wasn't the best word; I didn't mean to imply that using bitcoins was in any way a hassle.  I was commenting on the lack of demand for services on bitcoin-oriented programming-for-hire sites compared to sites that reach a wider audience.  I found myself spending far more effort-per-contract-won.