Modelling risk when market making

Solution 1:

Get your hands on some books on economics, econometrics, and financial engineering. Take a few years to understand them, and then model the bitcoin economy in terms of:

• the number of businesses actually taking bitcoin as payment (demand)
• the number of people actually paying businesses with bitcoin (supply)
• the rate of inflation due to mining (supply)

Speculation will dry up sooner or later, and we'll finally be left with a stable currency for doing business.

Also, your approach to modelling isn't so hot. Using variance of price as a metric of risk works okay in massive markets. Not so much in these tiny, highly volatile, shark infested markets.

As a limiting case, consider a market with exactly two participants. The model here is "negotiation", which is very different from the model for a large open market.

The point is: an effective model has to be driven by the economic considerations.