In this article I will outline a plan for those wishing to trade in Bitcoin while hedging themselves during periods of radical price fluctuation. The figures provided here are to make the material easier to digest, and I do not advocate for people to enter the Bitcoin marketplace with aspirations of making large deals yielding daily dividends. There are a few different websites and services to use when trading in Bitcoin, but here I will stick to the relative basics for people new to buying and selling Bitcoins. This is simply the way I go about doing it. You are free do otherwise, and please leave any suggestions, criticisms, or remarks in the comment section under this article.

To hedge oneself against the changing price of Bitcoin, one must be willing to stay invested in the market. The principle of buying low and selling high is the same as it would be for any other commodity one wishes to traffic in. However, within this last week Bitcoin’s price has dropped approximately 20%, and probably scared a lot of people into cashing out of the market. It is easy to get pessimistic and act on the fear that Bitcoin will hit rock-bottom in the near-future, but people are still using the cryptocurrency to trade. The problem with taking such drastic actions during price volatility is that it violates the principle of “buying low and selling high” and diminishes consumer confidence in the market. For those who liquidated their Bitcoin recently (unless they got in before November of 2013) more than likely they bought high and sold low; thus costing them the difference. I know the stress of being invested in a depreciating currency because I bought 2 Bitcoins at $320 each (at the beginning of this year). Using it to buy products and services, while still selling to clients still netted me a loss as the price dropped. My first transaction was at $236/BTC, and the next was at $212/BTC. After calculating in my 5% commission I still took a loss around $200.

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Here is my strategy for the future, and how I plan to hedge myself against Bitcoin’s price volatility.

By investing enough money into Bitcoin, I hope to maintain a set Bitcoin cap for myself. This cap can vary along with the frequency of my trades, but for the purposes of this explanation let’s say my cap is 5 BTC and each Bitcoin was procured for $200 at the time that I start. Starting with zero Bitcoins, I will have to invest $1000 into the cryptocurrency, which going through Coinbase will usually cost me 1% on top of my requested Bitcoin amount, making the total more like $1010. In an effort to hedge my assets, I will then keep $1000 liquid to buy Bitcoin at the same price I sell it. Instead of obsessing about the price of BTC, I will be focused on maintaining the amount of BTC I have capped myself at, while earning a commission on trades through building and managing a steady clientele. There are plenty of places and ways to sell or utilize your Bitcoin, but in an effort of simplicity let’s say you are only using LocalBitcoins.com to meet clients and make transactions with them. It will not be rare for clients to be looking for $500-$1000 in BTC, so maintaining a fast stream to procure Bitcoins is as important as maintaining good customer relations. I prefer to meet locally and do the transactions then-and-there, but there are a multitude of other ways to trade.

When it comes to charging a commission, I usually charge 5% which is competitive and more manageable for the calculation of totals. This only nets me 4% on transactions (after I buy, once again through Coinbase), but this makes my services more appealing and easier to work with for the consumer. For the following example I will use 6% as the commission rate only to make the calculation of profit easier to demonstrate (thus after paying Coinbase’s commission my commission profits are at 5%). In the next chart I will show how price fluctuations work into this model, while advising you to buy low and sell high if you wish it increase your personal BTC cap and overall assets. As mentioned before let’s start the BTC cap at 5 costing $200 each, and make 5 transactions totaling $2000 in Bitcoin changing hands.

Transaction chart 3

It is worth noting how unrealistic this chart is, for the price will change between trades, and not everyone wants or will receive an even amount of Bitcoin. More often than not clients will give the broker a dollar amount and from there a total is rendered that includes the broker’s commission. To find the live price of BTC for your calculations I use BitStamp and Preev.com as a referance for conversions during trades. You can even Google “The price of Bitcoin” in front of your clients to assure them the applied figures are accurate. I don’t like to give set-in-stone figures over the phone, or print out Bitcoin to hand to clients because in the time between the call and the trade clients or the broker could take a loss. Again, by buying the amount you sell, at the time of your transactions, it will ensure that you can earn a steady commision without selling high and then waiting to reinvest when the price lowers. However, feel free to watch the price and buy-in if you can catch it at a low, thus raising your market equity. This will guarantee more Bitcoin and extracted profit, but what is not guaranteed is how much the price will go up or down, by how much, or for how long. Thus buying as you sell to maintain the BTC cap amount will keep only the original investment of $1000 at the jeopardy of Bitcoin’s changing value.

Transaction chart 4

In this chart I have shown varying BTC prices, and how they affect trades. As the price changes so too will the value of your BTC equity, therefore clients are made to spend more money to obtain your holdings. This can be an exciting time because as demonstrated by trade #4 selling all your equity will net you a profit of $1467.50 (if you bought in at $200/BTC and include your commission). However, one must be cautious at this point to not over-invest in the market and tie up the $1000 cash liquidity kept in reserves.

Same goes for when the price is low. You can invest more in Bitcoin if you wish, but having less liquidity will force the broker to make more trips to the bank to deposit the cash received from trades. This is not a big deal if the price of BTC remains stable, but while cash for BTC is temporarily unavailable during bank transactions (or held in possession) the price could go up. This means the broker will now have to invest more money to maintain his 1:1 ratio of cash liquidity to Bitcoin equity. If the price drops the broker can actually gain more profit by increasing his cap, thus gaining more equity while maintaining the same in liquidity. This can get confusing as the broker makes more trades while the BTC price is changing. One must keep in mind how much was originally invested in Bitcoin as opposed to how much one can potentially invest in BTC. Maintaining a 5 BTC cap for oneself and buying as one sells, ensures that only the original investment of $1000 is at jeopardy to an unforeseen BTC market crash.

It was also important for me to maintain a steady BTC trade amount in the 2nd chart to demonstrate how fluxuating BTC prices will affect commissions and reinvestments. If a broker raises his cap without maintaining a 1:1 ratio of equity to liquidity it will take him longer to buy Bitcoins and restore his equity, or he could be locked into the BTC market longer and beyond his original investment (also without guaranteed trades he can make a commission on which then cashes him back out). Also, if the price rises the broker will be incentivized to add more cash liquidity to maintain enough capital for buying equity at the same price he sells it, when he sell. However, if one does not have enough spare cash sitting around at the time of the trades, it is necessary for the broker to reinvest at a time when the BTC price is lower than what he sold at. This ensures he does not take a loss through selling low only to then by high. The broker can also make more bank deposits to keep his revenue stream flowing, but this should also be done frequently to replenish cash liquidity.

The one-to-one method when brokering Bitcoin trades will protect the broker from price volatility, but will also limit the person’s agency within the market. This is simply one way of doing things, and I know there are plenty of sites like coinarch.com where daytraders can rideout market volatility. This article was to demonstrate a trading model for people who want to sell Bitcoins or manage cash-to-Bitcoin/Bitcoin-to-cash transactions between parties. There is also a plurality of ways to gamble with Bitcoin, but I hope I’ve demonstrated how one can use Bitcoin to make money on transactions without being held hostage to Bitcoin price speculation or take on unnecessary risk. Where daytraders want price volatility, a broker only wants steady clients and fast channels to convert cash into Bitcoins. Following my example, it is the size and number of trades that matters and not the fluctuating price of BTC.

Why not sell Bitcoins for cash when all the seller has to do is the math and manage clients? Making money by maintaining a clientele can start off slow, but transfers of Bitcoin are nearly instant and effortless. Your only competition is other brokers in the market or a BTC ATM near you. Together we can turn more people on to using cryptocurrency, thus backing a stronger Bitcoin economy with more assets and players in the game.

If you have enjoyed this article please donate BTC to:
1LKKhuWJF9kj3qzJxcVXmwpWCR5f8pUFnq

Protip:
If the client does not have enough money to pay your commission on top of the requested Bitcoin, you can subtract the commission from the BTC total you send.

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Since I am unlikely to write more articles about Bitcoin here are some links and videos I found interesting.

Tutorials by MrJayBusch

The Unfortunate Future of Bitcoin

Bitcoin Users In A Nutshell

Shit Bitcoin Fanatics Say:
Part 1
Part 2
Part 3

Bitcoin vs. Political Power: The Cryptocurrency Revolution

Cody Wilson, Defense Distributed, “The Bitcoin Community Has Sold Out”

Joe Rogan Experience #581 – Andreas Antonopoulos

Scams in the Bitcoin Space: Interview with MK Lords