reverse mergers

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Investors looking to bet on the future of digital currency could soon have an equity vehicle for doing so, courtesy of a penny stock reverse merger that should see bitcoin derivative trading platform Tera Exchange become a listed company.

Tera Group Inc. announced earlier Friday that it has entered into a merger agreement with MGT Capital Investments, a New York Stock Exchange-listed company that runs online gaming sites. Under the terms of the deal, Tera will take a controlling stake in MGT, which will issue common stock shares worth 70% of its pro form equity to Tera’s owners. MGT, which has a market capitalization of $5.2 million, was last quoted at $0.70, up 36% on the day.

In September, Tera became the first regulated platform for bitcoin derivatives, when the Commodities Futures Trading Commission approved its platform, which uses the proprietary TeraBit Index as a dollar/bitcoin price benchmark for managing swap contract execution. Swaps on the Tera platform are settled in dollars, which means that traders need not have direct ownership of bitcoins to participate.

The development of swaps and options trading in bitcoin is considered by many as a critical step in taming the sometimes wild volatility in the bitcoin market, as these hedging vehicles allow traders to offset risks of exchange rate losses.  A smoother price is in turn seen as a necessary prerequisite for enticing more people and businesses to use and accept bitcoin as a means of payment and value transfer.

Since its launch, Tera’s platform has seen over a million “indications of interest,” or bids and offers, though only a very small number of those have resulted in executed trades, said CEO Christian Martin.  That divergence, he said, reflected the price discovery process that’s inevitable in a very new marketplace with no historical references for building consensus around the valuation of differently timed swap contracts.

Mr. Martin, who has spent 25 years in emerging-market trading environments, said this was akin to the early days of the credit-default swap market. Back then, “people were starting to develop a use case and when the use case was developed then you got liquidity, and that’s where we’re at with the bitcoin community.”

Tera’s products are marketed to institutional investors. Currently, its clients include bitcoin payment processors, exchanges and insurers, along with a few hedge funds and other investment institutions.

Mr. Martin said that the company hopes to benefit reputationally from being the first bitcoin exchange with a public U.S. listing and that this status should help it raise capital for future operations. The Tera team is as yet undecided what to do about MGT’s legacy gaming operations, he said, acknowledging “there are synergies” with the bitcoin business. He added, “we’re going to review all of that together [with the MGT management] and decided whether that is an asset that has more value broken up or if it has more value in itself.”