The framework will allow parties to hedge price movements of Bitcoin using standardised terms, according to the company.
Bitcoin’s price has ebbed and flowed wildly since it first began trading in 2010, leading to concerns around hedging price risk. At the beginning of November, the digital currency was trading at US$198.22 per Bitcoin before spiking to US$1,147.24 on December 5. It dropped back down to a recent low of US$534.71 on February 26 and closed on March 23 at US$564.42, according to the CoinDesk Bitcoin Price Index.
“The use of a bitcoin swap is an inflection point in the evolution of the crypto-currency,” said Christian Martin, CEO of Tera Group. “There is incredible momentum and support behind this alternative currency. But even with all this excitement it is critical that the market participants have the tools at their disposal to hedge their price risk.”
Both demand for the ability to hedge Bitcoin price swings and regulatory scrunity on the currency have increased in recent months after Tokyo-based exchange Mt. Gox filed for bankruptcy upon losing an estimated US$650m of customer bitcoins.
Several exchanges launched or continued development on Bitcoin options and futures in 2013, including Dublin-based predictions market Predictious and start-up exchange ICBIT.
The demand for derivatives on Bitcoin has led to an increase in scrutiny from futures watchdog the CFTC, whose acting chairman, Mark Wetjen, told reporters at the beginning of March that the agency is currently investigating whether or not Bitcoin futures and options would fall under its purview. One industry source predicted a statement from the regulator could come within the next few weeks.
The Tera Bitcoin swap will be a non-deliverable and bilaterally negotiated-forward swap agreement. The product is currently unregulated, but Tera says it is seeking approval from the CFTC to list such a contract on a regulated swaps exchange once the CFTC makes determinations regarding the scope of its Bitcoin coverage. If it did receive regulatory approval, an on-exchange swap would be listed on Tera’s swap execution facility, TeraExchange.
The first planned Tera swap transaction will occur between two unidentified parties seeking to hedge the Bitcoin exchange rate for 25 days. A handful of other firms have expressed interest in conducting an over-the-counter Bitcoin swap agreement, said Tera president Leonard T. Nuara.
