Derivatives in Practice for Merchants

Despite the risk management tools already available to merchants that accept cryptocurrency payments, financial derivatives may still offer added value. Obviously, merchants are typically on the receiving side of cryptocurrency payments. Because of this, a merchant may want to protect himself against a drop of value of his received coins. If the merchant expects to receive a certain amount of cryptocurrencies over a certain period of time, it is possible to turn to Futures Contracts to fix the future value of the cash flows.


Assume a merchant expects to receive 1 Bitcoin in sales over the next week. Also, both the price of a single Bitcoin and a Futures Contract on a single coin maturing by the end of next week are trading at $475. If the merchant sells a Futures Contract, and the price of Bitcoin drops to $450, then the received Bitcoin from sales will sell for $450 while the Futures Contract will be worth $25. This way, the income became fixed at $475 at the moment the Futures Contract was sold.

Instant Exchange

Even though this is a good way to manage the price volatility in cryptocurrencies, merchants also have access to services by providers such as Coinbase that can instantly convert any cryptocurrency payment to fiat currencies. To completely remove price volatility, the cryptocurrency prices can be linked to a certain fiat currency value. For example, if a product is priced at $100, the client gets to pay an amount in cryptocurrencies with a value equal to $100 upon checkout. If this is immediately converted to $100 when received, the risk of a drop in prices is completely avoided.


Clearly, the benefit for merchants of using financial derivatives to the purpose of risk management is not as great as it could potentially be for cryptocurrency miners. But instant exchange services do not make financial derivatives completely useless. After all, Coinbase still charges a one percent fee for every instantly converted transaction. It is not a lot, but the cost of entering a Futures Contract (or even better a Forward contract) is zero. In fact, most Futures Contracts are priced a little bit above the market rate making it beneficial to a merchant selling them. One percent (or a bit more) may not seem like a lot, but especially on larger volumes financial derivatives may thus still prove themselves useful to merchants.

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