This is an opinion editorial 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 usually attributed to Mark Twain.
Lately, I’ve been wondering if we’re witnessing the rhyming of history.
For those of you who have had a chance to delve into our monetary history, you may have come across a little-known policy called Executive Order 6102. It was a significant attack on the sovereign individual and the free market. An event that drives US citizens away from gold, US dollars, and assets that benefit the US government.
What was Executive Order 6102?
During the Great Depression, President Franklin D. Roosevelt issued Executive Order 6102 on April 5, 1933, prohibiting the hoarding of gold coins, gold bars, and gold certificates in the continental United States.
At the time, the Federal Reserve Act of 1913 required that any newly issued dollar bills be backed by 40% gold. Executive Order 6102 exempted the Fed from this restriction, as it could obtain more gold than it could have under compulsorily by restricting the use of gold and buying it back at a rate set by the government.
Moreover, pushing people away from gold and into the US dollar during a period of monetary expansion and central bank intervention helped strengthen the dollar.
This Executive Order remained in effect until December 31, 1974, when Congress relegalized private ownership of gold coins, bars, and certificates.
Understanding Executive Order 6102, I wanted to shed some light on modern government thinking.
In 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 details many fascinating events, one event in particular caught my attention. Groman cites a leaked document from the US State Department dated December 10, 1974. We present a part of that document:
“The main effect of US private ownership will be the formation of a large gold futures market, according to dealers’ expectations. Each of the dealers expressed confidence that the futures market would be significant and that physical trading would be small by comparison. Expectations that large-volume futures operations will create a highly volatile market were also expressed. In turn, volatile price movements will reduce initial demand for physical storage and likely negate long-term savings by US citizens.
In fact, 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 savings. More importantly, this document was dated 21 days before individuals were again able to own gold.
What does it mean?
If people refuse to keep their hard-earned savings in a vehicle as stable as gold, they should look elsewhere. Since stocks and corporate bonds expose the investor to more risk and volatility, people have two choices: government bonds or the US dollar, both of which benefit the government.
The government has shown that there is no longer any need to issue express orders like 6102 to prohibit the holding of gold. To get the same effect, you just need to reduce the desirability of gold.
What does this have to do with the above 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 get exposure to the very popular S&P 500 without buying 500 individual stocks.
In and of itself, the futures market is not cause for alarm, but when the SEC prevents corporations and individuals from buying BTC through regulated means, allowing only 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 adopted, you could invest $100 in the ETF, which would buy $100 of bitcoin held by the fund, giving you direct bitcoin exposure. This would give pension funds, corporations, asset managers, etc. easier access to bitcoin. However, this is not yet available in the US; is only a futures ETF.
If it wasn’t already clear from the explanation of gold futures above, this could pose a threat to bitcoin.
When someone buys a bitcoin futures ETF, they don’t own bitcoin. Instead, they are exposed 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, he rolls the futures contract, sells the old contract, and buys a new contract even further ahead.
If you don’t fully understand how these ETFs work, don’t worry. The main goal here is to understand the shortcomings, not the functionality.
It is important to understand two features of futures ETFs over spot ETFs. In regular, functioning markets, if you want the right to buy something at a certain price in the future, you pay a premium for today’s price, and the further away you want to be from a price, the more premium you pay. More premiums are paid each time a deal is closed. This is called roll yield.
Even if the price of bitcoin stays the same over the life of the futures contract, the ETF will still lose value because the ETF is paying a premium to buy the right to buy bitcoin in the future. As this date approaches, he sells the contract and buys a new one in due course. This is known as rolling.
A byproduct of this rollover is that any premium paid decreases as the contract matures (roll yield). This creates a decline in the ETF’s value and is incredibly unfavorable for long-term holders.
As a result, this downturn encourages short-term trading, increased volatility, and short selling of ETFs as a portfolio hedge, depressing the price.
Is it possible to see the effects of these futures ETFs in action? Below is a graphic from Willy Woo. The approval date for the first futures ETF was October 2021.
Just before 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, like gold from the 1930s to the 1970s, both individuals and corporations have no regulated way to efficiently purchase bitcoin for long-term storage. The only difference is in the era of censorship, the government can covertly suppress what it deems inconvenient or disruptive to certain aspects of the economy rather than overtly suppressing them. However, all hope should not be lost.
Many people and corporations have been tirelessly petitioning for spot ETF approval as a way to get direct exposure to bitcoin. But this begs the question: is bitcoin one of the last remaining bastions for free markets and self-sovereign individuals, or is it already under the control of central planners?
This is a guest post by Seb Bunney. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.