According to the WSJ 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. A good idea or a bad one? That is irrelevant here. Here is what this means.
First, Wall Street is embracing BitCoin as it’s first virtual currency. It is here to stay and Wall Street will continue to build a market infrastructure around the currency. Second, BitCoin remains a highly speculative vehicles without any sort of “Value” backdrop. It is worth as much or as little as speculators are willing to pay for it. Since it’s value cannot be properly ascertained I continue to advice you to stay away. BitCoin might go to $1 just as easily as it might go to $1 Milliion. Stay out.
WSJ: New Derivative Guards Against Bitcoin’s Price Swings
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.
A CFTC spokesman didn’t immediately respond to a request for comment.
Routine swaps were pushed onto open platforms resembling exchanges under the 2010 Dodd Frank financial overhaul law. Non-uniform transactions that could not be routed to clearinghouses were allowed to be transacted off of those platforms.
The terms of the bitcoin swap will still have to be reported to regulators along with other swaps.
Whatever happens to the value of the currency, the party seeking the hedge has locked in the value of bitcoin for the life of the swap. The other party either gets a windfall if the value of bitcoin rises, or takes a hit if it falls below the composite price.