Bitcoin guide

This. Stripe is a business. They need to make money to stay alive. 0.5% is a whole lot better than 2.9% + $0.30. They are providing all of the infrastructure, auto conversion, and risk mitigation so it's not that high of a price.

Yes I believe this is so.

What I understood is as a 'hack' is the system could be taken advantage of (by doing the transaction in BTC) (for your own Stripe account by your own BTC wallet) and refund it if the price moves against you or allow it to convert (BTC->USD) if the price has moved in your favour. Since you get the USD from BTC yourself you have a sort of 'hedge'/call option to reverse it (premium being the initial conversion fees).

If the volatility is such that its more than the fees (in this case BTC is 'free' during the Beta) it can be taken advantage of - The refund & near zero fees being a mechanism of a one way bet.

I suppose this can be done already with credit cards and foreign currency purchases (if you have your own stripe account). Though the fees of 2.9%+ are significantly more than the volatility involved.

(Christian from Stripe here.)

Thanks for the clear description. In Stripe's case, this arbitrage won't work. When we refund a bitcoin payment, we refund the USD value of the payment (converted to bitcoin at the time of the refund). The customer does not necessarily receive the same bitcoin amount that they sent.

For example: (1) At the initial time, each bitcoin is worth 100 USD. A Stripe user accepts a 10 USD payment (0.1 bitcoin). (2) Bitcoin then increase in value to 1,000 USD each. The Stripe user fully refunds the payment. Their customer receives 0.01 bitcoin (10 USD).

The Stripe user and their customer both have a net of zero USD in this scenario.

We could have implemented refunds in the opposite way: a net of zero BTC and non-zero USD. However, that would have introduced the issue that you describe.

Regardless of the currency paid in, guaranteed refunds pegged to an exchange rate at the time the refund is issued will be a potential vector for manipulation. Consider these two cases using relevant historical data.

Case 1, Bitcoin refunds are pegged to the USD price at the time of sale and refund (your current strategy): It is currently 12/7/2014. The price per Bitcoin is approximately $380. I purchase a Christmas gift for someone,which just so happens to be exactly $380. I pay one Bitcoin, and my package is shipped. I receive the package on the 18th, at which point the exchange rate is approximately $310 per Bitcoin (about a 20% drop). At a 3% fee, I decide it would be prudent to ask for a refund, so I initiate the process and send back my gift. I am refunded $380 in Bitcoin at $310 each, and therefore receive 1.225 Bitcoin in return. I have effectively short-sold my Bitcoins while simultaneously locking the USD value in at the higher exchange rate (the value of the gift). This is a no-risk hedge, and is effective at any point the exchange rate fluctuates downwards more than 3% over the maximum refund interval. If the price goes up, I don't get a refund, and keep the gift, effectively locking in its value.

Case 2, Bitcoin refunds are pegged to the amount of Bitcoin initially spent: It is currently 11/4/2014. The price per Bitcoin is approximately $320. I buy a really nice bottle of Scotch from someone, that happens to cost exactly $320. I pay with one Bitcoin. On 11/13/2014, the price has risen to $420 per Bitcoin. I decide to get a refund, and as the amount of Bitcoin I spent is refunded, I receive 1 Bitcoin in return. This is again a no-risk hedge, as if the price drops, I keep the Scotch (or sell it, and increase my net Bitcoin holdings).

The only way that I can see you guys not having a financial risk as a counterparty, is if you do refunds in a way pegged to both USD and Bitcoin. You could achieve this by refunding an amount of Bitcoin equal to the product value in USD pegged to the exchange rate at the time of refund if the exchange rate rises, and refund an amount of Bitcoin equal to the amount initially paid if the exchange rate falls. This (rightly, in my opinion) puts all risk of exchange rate fluctuations solely on the person requesting the refund.

I understand that in charging a 3% fee on each transaction, all users of Stripe are in effect insuring your company against anyone attempting to game the system in this way, so my point may be moot (you can eat the losses from the malicious <1% of users), but I am of the strong belief that any system that can be gamed for a profit, most likely will be gamed, by some unscrupulous individual. Your company is effectively able to be used (currently) as a hedge against falling prices (scenario 1) in what is, at the moment, a year-long bear market for the exchange rate. This doesn't really feel to me like the smartest road to go down. What are your thoughts on this?

If you were using your testmode keys, then we would not generate a valid bitcoin address (to avoid all kinds of confusion). It must be the case that these were your livemode keys. If you're able to reproduce an inaccurate "test mode" banner, can you send a bug report to bitcoin@stripe.com? You can cc me, christian@stripe.com. I'm happy to take a look, but I haven't been able to reproduce on my side.