New Derivative Guards Against Bitcoin’s Price Swings

crashbitcoin24 Mar 2014 / Wall Street Journal – If you thought trading bitcoin was a shot in the dark, how about bitcoin derivatives?

A start-up derivatives exchange is working on what it claims will be the first bitcoin swap, allowing financial institutions to bet on the value of the embattled virtual currency.

Tera Group Inc, operator of the exchange, said it has drafted documentation for a 25-day swap transaction between a pair of U.S. financial firms. The swap works by allowing the holder, say a vendor who accepts bitcoin as a method of payment, to protect against a potential drop in the virtual currency’s value against the U.S. dollar.

Under the swap–known as a “non-deliverable” forward because the contract is settled in cash without the need to deliver bitcoin–the parties agreed to pay each other in the future a certain amount based on the values of the two currencies. The parties to the swap agreed to use an average price taken from multiple bitcoin exchanges to determine how they’ll settle up.

Tera declined to name the parties to the planned swap transaction, but said it should be complete within the next several weeks and would be transacted off Tera’s platform as an unregulated financial contract.

The contract comes as bitcoin proponents have pushed for the currency to bet used by mainstream investors in more regulated markets and to be used in day-to-day commerce. But bitcoin has recently suffered from wild price fluctuations and regulatory scrutiny that have threatened to dent its popularity among investors and other users.

Tera is separately applying to the Commodity Futures Exchange Commission to list bitcoin derivatives on its regulated exchange. The CFTC already has a laundry list of to-dos as it brings swaps under its purview in the wake of the financial crisis, and grapples with a range of budgeting constraints….. Read more

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