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To insulate those sellers against Bitcoin fluctuations, the eBay-like drug site also offers a hedging service. Sales are held in escrow until buyers receive the

To insulate those sellers against Bitcoin fluctuations, the eBay-like drug site also offers a hedging service. Sales are held in escrow until buyers receive their orders via mail, and vendors are given the choice to turn on a setting that pegs the escrow’s value to the dollar, with Silk Road itself covering any losses or taking any gains from Bitcoin’s swings in value that occur while the drugs are in transit. I was wondering exactly how vendors could have withstood a > 50% loss of value while their Bitcoins were in escrow. Silk Road is a remarkable service and provides an experience that will keep the value of Bitcoin alive at some level for a long time.

corin_ 14y ago
So while Bitcoin’s crash last week from $237 to less than $100 means that the Dread Pirate Roberts was likely forced to pay out much of the extra gains Silk Road made from Bitcoin’s rise, most of his sellers were protected from those price changes and continued to trade their drugs for Bitcoins despite the currency’s plummeting value. Is that a good assumption that most sellers would have taken this protection? Given how Bitcoin was rising I would have thought at least some would have taken the gamble (and lost), but no idea how many.
- eof 14y ago
  I think many were taking the gamble. What ended up happening is that a bunch of vendors who did not take the hedging canceled the orders. Since hedging doesn't protect buyers, the buyers just get their original btc back; this made a lot of people upset and their are multiple threads on reddit and the silk road forums calling out these vendors who essentially cheated the escrow/hedging system. I wonder if it will have an effect with buyers demanding hedging as well.
  - dmix 14y ago
    > I think many were taking the gamble The article says many didn't take the gamble: > As a result, only about 1,000 sales listings out of more than 11,000 were taken off the site during the crash, according to DPR. “Those were from vendors who didn’t protect themselves,” he (or she) says. “The volatility only hurts vendors who don’t hedge their escrow balance.”
    - corin_ 14y ago
      Did the 10,000 take the protection, or did some of them gamble, but chose to honour they sales (and/or had already shipped product with funds still in escrow before the price dropped)?
  - makomk 14y ago
    I think the seller using hedging does insulate buyers from changes in the Bitcoin price if they get refunded. If Silk Road didn't do things that way, it'd be possible for a malicious colluding buyer and seller to profit from Bitcoin's instability at the expense of the Silk Road's operator. There were a lot of complaints on the Silk Road forums about cancelled orders though, and sellers saying they took a loss in order not to cancel.
- TheAnimus 14y ago
  Well he might not have made a loss, depending on the size of the premium he has taken. Also if the market is liquid enough and he has the right kind of trades he might even be able to automatically delta hedge. Or even more simply, he just immediately de-bitcoins it, then re-bitcoins it when releasing the funds from escrow. This is probably the most likely.
  - mike_esspe 14y ago
    If he is doing automatic hedges, then it's relatively easy to uncover his identity with access to main BTC exchanges?
    - TheAnimus 14y ago
      Depends, I doubt enough of the information about what is going to be hedged is public, and I'd imagine he takes a view on BTC to help stay anonymous too. (Ie delays certain operations) It would also be trivial to have choice of exchanges and settlement currencies. I don't know enough about silk road, having only read about it never played with it, but I'm guessing you can't see the time a merchant has placed an offer to the time they chose the hedging. Combined with the low overall spend, and ever increasing liquidity of BTC, I would have thought that would be quite a challenge. It is funny with BTC, I was playing with some exchanges the other day and there did appear to be free money to be had as not only some Bid Offer spreads were above or below other exchanges, there was some free cash to be had fixing the FX market, say selling in USD to buy in EUR with a hedge on a regular forex site. I figure its still pennies in front of bulldozers time mind, but the thing is its not a perfect market. As such hiding in it whilst making reasonable profits should be easy if you charge enough premium for the option.

corin_ 14y ago

So while Bitcoin’s crash last week from $237 to less than $100 means that the Dread Pirate Roberts was likely forced to pay out much of the extra gains Silk Road made from Bitcoin’s rise, most of his sellers were protected from those price changes and continued to trade their drugs for Bitcoins despite the currency’s plummeting value. Is that a good assumption that most sellers would have taken this protection? Given how Bitcoin was rising I would have thought at least some would have taken the gamble (and lost), but no idea how many.

eof 14y ago
I think many were taking the gamble. What ended up happening is that a bunch of vendors who did not take the hedging canceled the orders. Since hedging doesn't protect buyers, the buyers just get their original btc back; this made a lot of people upset and their are multiple threads on reddit and the silk road forums calling out these vendors who essentially cheated the escrow/hedging system. I wonder if it will have an effect with buyers demanding hedging as well.
- dmix 14y ago
  > I think many were taking the gamble The article says many didn't take the gamble: > As a result, only about 1,000 sales listings out of more than 11,000 were taken off the site during the crash, according to DPR. “Those were from vendors who didn’t protect themselves,” he (or she) says. “The volatility only hurts vendors who don’t hedge their escrow balance.”
  - corin_ 14y ago
    Did the 10,000 take the protection, or did some of them gamble, but chose to honour they sales (and/or had already shipped product with funds still in escrow before the price dropped)?
- makomk 14y ago
  I think the seller using hedging does insulate buyers from changes in the Bitcoin price if they get refunded. If Silk Road didn't do things that way, it'd be possible for a malicious colluding buyer and seller to profit from Bitcoin's instability at the expense of the Silk Road's operator. There were a lot of complaints on the Silk Road forums about cancelled orders though, and sellers saying they took a loss in order not to cancel.
TheAnimus 14y ago
Well he might not have made a loss, depending on the size of the premium he has taken. Also if the market is liquid enough and he has the right kind of trades he might even be able to automatically delta hedge. Or even more simply, he just immediately de-bitcoins it, then re-bitcoins it when releasing the funds from escrow. This is probably the most likely.
- mike_esspe 14y ago
  If he is doing automatic hedges, then it's relatively easy to uncover his identity with access to main BTC exchanges?
  - TheAnimus 14y ago
    Depends, I doubt enough of the information about what is going to be hedged is public, and I'd imagine he takes a view on BTC to help stay anonymous too. (Ie delays certain operations) It would also be trivial to have choice of exchanges and settlement currencies. I don't know enough about silk road, having only read about it never played with it, but I'm guessing you can't see the time a merchant has placed an offer to the time they chose the hedging. Combined with the low overall spend, and ever increasing liquidity of BTC, I would have thought that would be quite a challenge. It is funny with BTC, I was playing with some exchanges the other day and there did appear to be free money to be had as not only some Bid Offer spreads were above or below other exchanges, there was some free cash to be had fixing the FX market, say selling in USD to buy in EUR with a hedge on a regular forex site. I figure its still pennies in front of bulldozers time mind, but the thing is its not a perfect market. As such hiding in it whilst making reasonable profits should be easy if you charge enough premium for the option.