[RFC/RFQ] Best way to insure BTC/fiat exchange volatility?

[zefir]

Folks,

the IPO of my mining bonds is scheduled for today (see my sig), and if everything goes well, I need to have a better idea on how to preserve the current fiat equivalent value of BTCs over a given time period.

This is the scenario:

• through IPO I am going to collect ~1.5kBTC that are fully invested in new mining equipment
• the manufacturer will be paid in ~4 weeks, accepts BTC and fiat via wire, CC and PP

Precondition is, investors expect the mining power to be bought matches at least today's prices (in terms of MH/s$).

Alternative 1: stay with BTC
The most obvious approach to finalize the re-investment would be to put the BTC into a paper-wallet for the month and then send them to the manufacturer to pay the new rig. Also obvious this bears a very high risk of BTC being worth 20% less in fiat than they are today. Since the prices are (still ) calculated based on the fiat equivalent, I might fail to pay the order in full at due date. OTOH I might be able to save 20% if exchange rates go the other direction, but the purpose of my mining company is growth and not speculation. To realize this option I'd need to buy some BTC/US$ put options or CFDs that might end up costing me more than the other alternative.

Alternative 2: convert to fiat
Here I'd send the coins collected directly to exchange for conversion and (since I can't wire from MtGox to arbitrary bank accounts) then transfer US$ to my bank, CC or PP account. Expected to loose ~2% for trading, exchange and withdrawal fees. Plus again some fees to wire it from my bank account to manufacturer's - loosing a total of maybe 3%.

Have you guys who already collected money from crowd-funding experience on how to deal this with the smallest loss?

Or you large scale lenders out there, anyone willing to take 1-1.5kBTC from me tomorrow and give me back their fiat equivalent when I need them (with one week advance notification time)? You'll need to guarantee payback in a way that can be legally enforced. Please PM me with your proposal.


Thanks, Zefir

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[Meni Rosenfeld]

It's really simple. If you want to preserve the USD value of your proceeds you sell them now. Depending on your wire costs, you should consider keeping the USD on the exchange and buying bitcoins when it's time to pay.

Any other option is basically a combination of this with some other instrument. You may want to try your luck gaining some interest making a USD-denominated loan/deposit (whether payment is with bitcoins or something else) but that's not as common here as a BTC-denominated loans.

[zefir]

It's really simple. If you want to preserve the USD value of your proceeds you sell them now. Depending on your wire costs, you should consider keeping the USD on the exchange and buying bitcoins when it's time to pay.

Any other option is basically a combination of this with some other instrument. You may want to try your luck gaining some interest making a USD-denominated loan/deposit (whether payment is with bitcoins or something else) but that's not as common here as a BTC-denominated loans.

Hi Meni,

thought you're on your green holidays (that's how the Swiss call their military reserve duty).

Hm, I hoped to bypass the hassle with multiple conversions and transfers. Not only to not loose 3-5% along the whole track, but also for some uncertainties that might show up (withdraw limits, transfer times (had everything between 5 and 26 days from Europe to MtGox), etc.).

There are large scale lenders around that give quite high MPRs for deposits to sub-lend the coins and maybe someone is risk-aware and brave enough to take the insurance. Let's see...

[streblo]

Hello,

I believe Meni is saying to move the BTC to USD, but leave it on the exchange (e.g., Mt Gox). Then when it comes time to pay the manufacturer, you convert the USD back to BTC and send BTC. With this option, you bear no exchange-rate risk, and you minimize your fees because there are no transfers of money (you only have to pay the BTCUSD bid/ask spread).

[zefir]

Hello,

I believe Meni is saying to move the BTC to USD, but leave it on the exchange (e.g., Mt Gox). Then when it comes time to pay the manufacturer, you convert the USD back to BTC and send BTC. With this option, you bear no exchange-rate risk, and you minimize your fees because there are no transfers of money (you only have to pay the BTCUSD bid/ask spread).

Yes, fully understood.

But dumping 1.5k coins at MtGox right now would dump the price from 4.95 to 4.89 (looking at the order book), buying them back after 4 weeks would do the same in the other direction - including fees this adds to more than 3% loss

Plus: taking the loss is not the worst thing to care. Placing a market sell order with that volume immediately triggers some automated trading bots out there to start selling like crazy and induce leveraged price fluctuations. That would be contra-productive at least - we had a relative long period with steady exchange rates around 5 that added quite some confidence in Bitcoins generally.

No, if nobody steps up with an idea how to preserve the fiat equivalent of BTC for a given time at no cost, I'll manage the risk by myself. That is: stay with Bitcoins and recoup losses out of my private wallet.


Thanks for the feedback.

[Meni Rosenfeld]

thought you're on your green holidays (that's how the Swiss call their military reserve duty).

I specified the dates during which I will have limited availability, we're not there yet.

Hm, I hoped to bypass the hassle with multiple conversions and transfers. Not only to not loose 3-5% along the whole track, but also for some uncertainties that might show up (withdraw limits, transfer times (had everything between 5 and 26 days from Europe to MtGox), etc.).

Good point about withdraw limits, but barring unforeseen circumstances, you should be able to withdraw the coins over several days. You don't ever need to move fiat into or out of the exchange, so I don't understand your transfer time point.

There are large scale lenders around that give quite high MPRs for deposits to sub-lend the coins

They do it for BTC-denominated loans, not for USD-denominated loans.

and maybe someone is risk-aware and brave enough to take the insurance. Let's see...

It's not about being risk-aware and brave. By taking BTC and agreeing to return their current USD equivalent they are lengthening their BTC position, and presumably it is already as long as they want it. If you want them to lengthen their position they will charge for the service, more or less as much as it would cost you to sell on the exchange.

Plus: taking the loss is not the worst thing to care. Placing a market sell order with that volume immediately triggers some automated trading bots out there to start selling like crazy and induce leveraged price fluctuations. That would be contra-productive at least - we had a relative long period with steady exchange rates around 5 that added quite some confidence in Bitcoins generally.

I am not sure you understand how this works. (And I'm not sure I understand how it works either). Some bots will sell in response to your trade, some will buy. Anyway you are greatly overestimating the effect of 1500 coins, to you it seems like a lot but tens of thousands of coins are traded every day. You are not going to destroy Bitcoin's price stability by doing this.

No, if nobody steps up with an idea how to preserve the fiat equivalent of BTC for a given time at no cost,

Functionally, preserving the fiat equivalent means selling and then buying. There can be other instruments that are equivalent to this but mechanically work differently, but since those markets are underdeveloped they will end up costing more. Mtgox exists precisely to buy and sell and is the largest volume exchange, so if you're worried about the effect this will have on the market, you are not going to find someone on the forum that will handle this volume at a lower cost. Maybe you'll find someone to do this at a similar cost but without some of mtgox's other problems.

I'll manage the risk by myself. That is: stay with Bitcoins and recoup losses out of my private wallet.

Sure, if maintaining a neutral position isn't worth 3% to you then by all means, keep the bitcoins.

[zefir]

Thanks for the feedback. The issue became obsolete after manufacturer will not be able to accept Bitcoin payments - I'll need to convert to fiat anyhow. Nevertheless, I added my thoughts inline.

Cheers

Good point about withdraw limits, but barring unforeseen circumstances, you should be able to withdraw the coins over several days. You don't ever need to move fiat into or out of the exchange, so I don't understand your transfer time point.

I was referring to the transfer times for SEPA wires. I experienced the times from EU to MtGox to be up to 4 weeks and suspect that in the other direction there also are variations of the nominal 5day transfer times. And since you can only withdraw to your own account, it will take two international wire transfers to proceed.

There are large scale lenders around that give quite high MPRs for deposits to sub-lend the coins

They do it for BTC-denominated loans, not for USD-denominated loans.

I know some dealing US$-based, but of course not at two-digit MPRs.

Plus: taking the loss is not the worst thing to care. Placing a market sell order with that volume immediately triggers some automated trading bots out there to start selling like crazy and induce leveraged price fluctuations. That would be contra-productive at least - we had a relative long period with steady exchange rates around 5 that added quite some confidence in Bitcoins generally.

I am not sure you understand how this works. (And I'm not sure I understand how it works either). Some bots will sell in response to your trade, some will buy. Anyway you are greatly overestimating the effect of 1500 coins, to you it seems like a lot but tens of thousands of coins are traded every day. You are not going to destroy Bitcoin's price stability by doing this.

No, I'm in fact not a trader. But I learned the hard way when once I put a sell order for 800 coins and wrongly tickled it as market order. I moved the price down by 12 Bitcents with the order being executed at an average of 5 Bitcent below previous price. Sure, way more coins are traded over 24h, but if you (are stupid enough to) dump 1k BTC, you still can move the price significantly (depending on order book) for a short moment.

As for the bots, I followed Goomboo's journal for a while and even tried to implement his trading schema. It really worked and generated some 0.3% profit, but MtGox took 0.6% and made a loss of it. But if you take time and follow the real-time BTC charts e.g. here you can see some applied the strategy and the bots running wild as soon as an indicator (e.g. short/long SMA crossing) is triggered. You just need to push a little and see how they pull it further.

[Meni Rosenfeld]

Good point about withdraw limits, but barring unforeseen circumstances, you should be able to withdraw the coins over several days. You don't ever need to move fiat into or out of the exchange, so I don't understand your transfer time point.

I was referring to the transfer times for SEPA wires. I experienced the times from EU to MtGox to be up to 4 weeks and suspect that in the other direction there also are variations of the nominal 5day transfer times. And since you can only withdraw to your own account, it will take two international wire transfers to proceed.

But you don't need SEPA transfers...

Plus: taking the loss is not the worst thing to care. Placing a market sell order with that volume immediately triggers some automated trading bots out there to start selling like crazy and induce leveraged price fluctuations. That would be contra-productive at least - we had a relative long period with steady exchange rates around 5 that added quite some confidence in Bitcoins generally.

I am not sure you understand how this works. (And I'm not sure I understand how it works either). Some bots will sell in response to your trade, some will buy. Anyway you are greatly overestimating the effect of 1500 coins, to you it seems like a lot but tens of thousands of coins are traded every day. You are not going to destroy Bitcoin's price stability by doing this.

No, I'm in fact not a trader. But I learned the hard way when once I put a sell order for 800 coins and wrongly tickled it as market order. I moved the price down by 12 Bitcents with the order being executed at an average of 5 Bitcent below previous price. Sure, way more coins are traded over 24h, but if you (are stupid enough to) dump 1k BTC, you still can move the price significantly (depending on order book) for a short moment.

If you need to sell 1K BTC then you need to sell 1K BTC. There's nothing stupid about it. The overall price may be better if you do it in a few smaller increments or a limit order, but it might not be, and you're taking a risk which is what you wanted to avoid. A ~1% slippage isn't that terrible.

It really worked and generated some 0.3% profit, but MtGox took 0.6% and made a loss of it.

The trading strategy needs to take fees into account. Seems like what you should have said is "it really didn't work and it generated some 0.3% loss".

[zefir]

[...]
If you need to sell 1K BTC then you need to sell 1K BTC. There's nothing stupid about it. The overall price may be better if you do it in a few smaller increments or a limit order, but it might not be, and you're taking a risk which is what you wanted to avoid. A ~1% slippage isn't that terrible.

Bottom line: we need more liquidity at the exchanges, or even better: everyone accepting BTC.

It really worked and generated some 0.3% profit, but MtGox took 0.6% and made a loss of it.

The trading strategy needs to take fees into account. Seems like what you should have said is "it really didn't work and it generated some 0.3% loss".

They way you are describing the fact wears any intermediate positive aspect away, but in the end of course you're right