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Tera Group creates framework for Bitcoin derivative

A pile of physical Bitcoins.
A pile of physical Bitcoins.

On March 24, Tera Group Inc. announced in a press release that they have constructed the terms for a planned financial derivative between Bitcoins and US dollars. They intend to have a swap between two US institutions in an amount of millions of dollars and tens of thousands of Bitcoins for the purpose of hedging the value of Bitcoins.

“The use of a Bitcoin swap is an inflection point in the evolution of cryptocurrency,” said Tera CEO and co-founder Christian Martin. “There is incredible momentum and support behind this alternative global currency. But even with all this excitement, it is critical that the market participants have tools at their disposal to hedge their price risk.”

Up until now, there has been no effective way to hedge or short Bitcoins against fiat currencies. While some options have been available, they have been clunky and only marginally profitable. Some analysts have speculated that one reason for the drastic increase in the dollar valuation of Bitcoins throughout 2013 is that there was no effective way of betting against it without first holding Bitcoins, selling them, and trying to buy back in at a lower exchange rate.

The Tera Group plan is to start with an unregulated non-deliverable forward swap agreement that will allow institutions to complete a transaction between Bitcoin and any other currency at a particular exchange rate and hedge the exchange rate for 25 days. Tera is also seeking permission from the Commodity Futures Trading Commission to create a similar derivative on a regulated marketplace.

“We as a company are trying to bring some structure and some protocol to help the Bitcoin community,” Leonard Nuara, the president of Tera, said during a phone interview today. “It provides a tool for a natural hedge to get relief from the price changes in Bitcoin.” Bitcoin has been notorious for having a volatile exchange rate with US dollars, changing hundreds of dollars in the timespan of a few hours on several occasions. The recent troubles at Mt. Gox and VirCurEx have also led to higher variability of exchange rates.

Bitcoin exchange rates were volatile following the news. In the 12 hours following the press release, the rate on Bitstamp rose from $561.01 to $592.60, then fell to $572.93 as of this writing. The rate on Bitfinex rose from $562.25 to $590.00, then fell to $575.12 as of this writing. The rate on BTC-e rose from $562.00 to $591.95, then fell to $576.56 as of this writing.