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Comment by tedunangst | Hacker News Reader

I wonder if there's still a small arbitrage window here. The ten minute lockin is essentially a short lived option. If you lockin a rate at $101 and the price drops to $100 over the next nine minutes, buy bitcoin and complete the transfer, then request refund. If the price goes up, let the option expire.

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The peak daily volatility of bitcoin is in the ~10% a day range [1], varying a lot month to month. The implied 10-minute volatility is 10% / sqrt(24 * 6) ~= 0.83%, assuming independence of successive 10-minute windows. This is likely an underestimate, because most financial time series display mean reversion.

The Black-Scholes price of an at-the-money option is very approximately 1/sqrt(2pi) * vol to maturity, so the option is worth somewhere around 0.3% of the notional price on a high-volatility Bitcoin day, somewhat less than the 0.8% transaction charge.

However, the charge is only paid if you go through with the transaction, so really this is an option that's 0.8% out of the money. With that assumption, the value of the option is just 0.08%.

[1] https://btcvol.info/

It's not much, but if somebody puts a button on the internet that gives me 8 cents every time I push it, I might try pushing it a few million times. :)

Yeah, the real barrier stopping you is being able to trade Bitcoins against USD on demand, which I suspect costs a lot more than 0.08%.

Plus you have to get refunded over and over and over.

I'm guessing that Stripe (or coinbase) has figured out that the cost of the ten-minute option is far less than the 0.8% processing fee they charge.

You only pay the fee if you end up paying, which is exactly the times that you make a profit since the value went down (making the coins worth less, and so a higher guaranteed price is helpful to you). If the value goes up or stays the same (or drops by less than the fee) you don't do anything.

You'd also need to be shorting bitcoin at the same time and covering the short at the same time as sending the transaction, but that's not hard. (Or already have the money in an account and buy it on demand, but that will add a delay)

So you make money or don't do anything, stripe/coinbase is never paid for their risk.

volatility arbitrage exists in pretty much every currency, so this isn't a vulnerability, it's a FX trade.

But I suspect it takes less than 10 minutes to adjust, and nobody will give you a free ten minute option on the price.

Hmm, good point. I suspect that they'd notice if you create lots of transactions and only complete a fraction of a percent of them.

I might be missing something, but it seems you're making some unwarranted assumption there.

Stripe guarantees a $101 quote to the merchant. That is, as long as the consumer pays 1 BTC within 10 minutes, the merchant will get $101 -- essentially Stripe buys BTC at $101. But Stripe is not selling BTC at $101! So even if the bitcoin price goes down 5 minutes later so that Stripe promises to buy at $100 (for new orders), it's not necessarily true that the consumer can buy at $100.

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