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Despite its instability and susceptibility to risk, Bitcoin derivatives may be available as an NDF in the near future
The eventful year of high profile events and ever-changing circumstance which surround virtual currency have largely not resulted in FX firms adopting it as a tradable instrument, except for a few pioneering mavericks.
Even the volatility which caused Bitcoin, the most prominent of all virtual currencies, to soar in value from just a few dollars to over $1000 to 1 Bitcoin during the latter part of 2013 did not generate a flood of additions to trading platforms across the world’s retail FX participants.
It could be that as a raw instrument, virtual currencies such as Bitcoin are simply not an attractive proposition to those who seek to invest in liquid markets but maintain a modecum of stability by putting their faith in sovereign currencies, whilst by the same token, FX companies may shy away from it on risk management grounds.
In the future, however, there may be more interesting methods of trading in Bitcoin, with pre-determined amount being agreed at which time the trade takes place, in the same vane as a Non-Deliverable Forward (NDF).
Tera Group, the holdings company behind Tera Exchange has, according to the Wall Street Journal, issued 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.
This categorizes the transaction as an NDF, due to the fact that the contract is settled in cash without actually having to deliver the Bitcoin, with both sides of the transaction agreeing to ratify the transaction with payment in the future, to the value of a certain amount based on the value of the two currencies, with a pre-agreed average price being calculated across a series of Bitcoin exchanges to determine the amount payable.
Tera Group’s multi-asset class facility Tera Exchange stands the firm in good stead for taking what could be considered something of a risk in initiating a Bitcoin NDF, however it is a firm with proven experience in doing so with other asset classes, operating a central limit order book with an all-to-all platform across interest rate, credit and FX derivatives for all clearable swaps contracts.
The company anticipates that this facility should be complete within the next several weeks and would be transacted off Tera’s platform as an unregulated financial contract.
As unwelcome in certain markets as Bitcoin is, whereby nations with markets of great interest to the entire electronic trading industry such as China have made consistant attempts to put an end to the use of virtual currencies, along with the demise of Bitcoin exchanges suh as MtGox and previously Bitfloor, there is a glimmer of hope for its permanency in some of the most stable financial markets economies on earth. Singapore recently set forth rulings on the potential regulation of virtual currency intermediaries, giving rise to the notion that it with such a framework, it could prosper in the region.
In Tera’s native United States, the company is separately applying to the Commodity Futures Exchange Commission (CFTC) 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.
Stability is not a word which could, until now, be associated with Bitcoin, however with the ability to maintain the value of the Bitcoin for the entire period of the swap, a wider appeal may emerge for those wishing to capitalize on the movement of the currency without the extremely risky consequences of a spot trade.
In this circumstance, one trader makes a profit if the value of the virtual currency rises, but makes a loss if it falls below the composite price, however, whether the fears imparted in the minds of the populace in 1949 by George Orwell with regard to the potential pitfalls of a cashless society will be calmed is a matter which only time will tell.