Bitcoin Price Suppressed by Government Agencies – Bitcoin Magazine
This is an opinion editorial by Seb Bunney, co-founder of Looking Glass Education and author of the Qi of Self-Sovereignty newsletter.
“History never repeats itself, but it often rhymes.” — A quote often misattributed to Mark Twain.
Lately I have been wondering if we are witnessing a rhyme in history.
For those who have had the chance to dig into our monetary history, you may have encountered a little-known policy called Executive Order 6102. It was a momentous attack on the sovereign individual and the free market. An event that led American citizens away from gold, to the US dollar and assets that the US government benefits from.
What was Executive Order 6102?
During the Great Depression, President Franklin D. Roosevelt issued Executive Order 6102 on April 5, 1933, which prohibited the hoarding of gold coins, bullion, and gold certificates in the continental United States.
At the time, the Federal Reserve Act of 1913 required all newly issued dollar bills to be 40% backed by gold. Executive Order 6102 freed the Fed from this restriction as it could compulsorily acquire more gold than it otherwise would have been able to by limiting the use of gold and buying it back at an exchange rate defined by the government.
Also, pushing people out of gold and into US dollars helped strengthen the dollar during a period of monetary expansion and central bank intervention.
This Executive Order was in effect until December 31, 1974, when Congress again legalized private ownership of gold coins, bars, and certificates.
With an understanding of Executive Order 6102, I wanted to shed light on modern government thinking.
In the eye-opening book “The Mr. X Interviews: Volume 1”, Luke Gromen takes the reader on a journey through the past, present and future macroeconomic environment. Although the book describes many captivating incidents, there was one incident in particular that stood out to me. Groman cites a leaked US State Department document dated December 10, 1974. Here is an excerpt from that document:
“The biggest impact of private US ownership, according to dealers’ expectations, will be the formation of a significant gold futures market. Each of the dealers expressed the belief that the futures market would be of significant proportion and physical trading would be minimal by comparison. It was also expressed the expectation that trading in large volume futures would create a highly volatile market. In turn, the volatile price movements would reduce the initial demand for physical inventory and most likely discourage long-term hoarding by American citizens.”
Essentially, the government knew that by promoting the gold futures market, gold would experience a significant increase in price volatility, reducing its desirability and reducing long-term hoarding. More importantly, this document was dated 21 days before they reinstated the ability for individuals to own gold again.
What does this mean?
If people are disincentivized to store their hard-earned savings in a stable vehicle like gold, they need to look elsewhere. With stocks and corporate bonds exposing the investor to greater risk and volatility, people have two options: government bonds or US dollars, both of which benefit the government.
The government has shown that it no longer needs to overtly issue an order like 6102 to ban the hoarding of gold. It only needs to reduce the desirability of the gold to achieve the same effect.
What does this have to do with the aforementioned quote?
In October 2021, the Securities and Exchange Commission (SEC) approved the first Bitcoin futures Exchange Traded Fund (ETF). For the less financially inclined, an ETF is a regulated investment vehicle that facilitates the purchase of its underlying assets. For example, if you buy the SPY ETF, you can own exposure to the hugely popular S&P 500, without buying 500 individual stocks.
By itself, the futures market is no cause for alarm, but when the SEC prevents companies and individuals from buying BTC through regulated means, and only allows futures ETFs, we have a problem.
Let me explain.
Companies in the Bitcoin industry have been applying for a “spot Bitcoin ETF” for years, but to no avail. If this spot ETF were to be accepted, you could invest $100 in the ETF, which would then buy $100 in bitcoin held by the fund, giving you direct exposure to bitcoin. This will give pension funds, companies, asset managers, etc., easier access to bitcoin. But this is not yet available in the US; only a futures ETF is.
If it wasn’t already clear from the gold futures explanation above, this could pose a threat to bitcoin.
When someone buys a bitcoin futures ETF, they don’t own bitcoin. Instead, they own exposure to an ETF that holds bitcoin futures contracts. In short, this futures ETF buys contracts for the delivery of bitcoin at a future date. As that date approaches, it rolls the futures contract, sells the old contract and buys a new contract further out.
Don’t worry if you don’t fully understand how these ETFs work. The point here is not to understand the functionality, but rather the disadvantages.
It is important to understand two characteristics of futures ETFs over spot ETFs. In normal, functioning markets, if you want the right to buy something at a specified price in the future, you pay a premium over today’s price, and the longer you want to lock in a price, the more premium you pay. Each time the contract is rolled, more premium is paid. This is called rolling yield.
Even if bitcoin’s price remains the same throughout the life of the futures contract, the ETF will still decline in value because the ETF pays a premium to buy the right to buy bitcoin in the future. When that date approaches, it is time to sell the contract and buy a new one. This is known as rolling.
A by-product of this rolling is that any premium paid decreases as the contract expires (roll yield). This creates a decline in the value of the ETF and is incredibly unfavorable for long-term owners.
As a result, this decay encourages short-term trading, increased volatility and short selling of the ETF as a portfolio hedge, depressing its price.
Is it possible to see the effect of these futures ETFs in action? Below is a diagram from Willy Woo. The date of approval of the first futures ETF was in October 2021.
(Source)
Immediately prior to the launch of the first regulated futures ETF, we saw a significant increase in futures dominance. The futures market currently dictates 90% of bitcoin’s price (green line in the chart above).
In summary, just like gold from the 1930s to the 1970s, both individuals and companies have no regulated way to effectively purchase bitcoin for long-term storage. The only difference is in the age of censorship, instead of overtly suppressing what the government deems unfavorable or offensive to certain aspects of the economy, it can covertly suppress them. However, all hope should not be lost.
Many people and companies are tirelessly asking for the approval of a spot ETF, a way to get direct exposure to bitcoin. But this begs the question: Is bitcoin one of the last remaining bastions of the free market and self-sovereign individuals, or is it already under the thumb of the central planners?
This is a guest post by Seb Bunney. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
