December 1, 2022

Bitcoin Price Suppressed By Government Agencies Cryptocurrency

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 common quote misattributed to Mark Twain.

Lately I wonder if we are witnessing a rhyme of history.

For those who have had the chance to dig into our monetary history, you may have come across a little-known policy called Executive Order 6102. It was a momentous attack on the sovereign individual and the free market. An event that moved US citizens away from gold, towards the US dollar and the assets that the US government benefits from.

What is Executive Order 6102?

During the Great Depression, President Franklin D. Roosevelt published Executive Order 6102 on April 5, 1933, prohibiting the hoarding of gold coins, gold bars, and gold certificates in the continental United States.

At that time, the Federal Reserve Act of 1913 required that any newly issued dollar bill be 40% supported by gold. Executive Order 6102 released the Fed from this restriction because it could coercively obtain more gold than it otherwise could by limiting the use of gold and buying it back at an exchange rate defined by the government.

Additionally, pushing people to switch from gold to the US dollar 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, bullion, and certificates.

With an understanding of Executive Order 6102, I wanted to shed some light on modern government thinking.

In the revealing book, “Interviews with Mr. X: Volume 1», Luke Gromen takes the reader on a journey through the past, present and future macroeconomic environment. Although the book details many gripping events, one event in particular stood out to me. Groman quotes a leaked document from the United States Department of State dated December 10, 1974. Here is an excerpt from this document:

“The primary impact of US private ownership, traders expect, will be the formation of a large gold futures market. Each of the dealers expressed the belief that the futures market would be of a large proportion and the physical exchanges would be miniscule in comparison. It was also said that large-volume futures trading was expected to create a highly volatile market. In turn, volatile price movements would diminish the initial demand for physical holdings and most likely negate long-term hoarding by US citizens.

Essentially, the government knew that by promoting the gold futures market, gold would experience a significant increase in price volatility, diminishing its appeal and reducing long-term hoarding. More importantly, this document was dated 21 days before restoring the ability for individuals to own gold again.

What does that mean?

If people have no incentive to store their hard-earned savings in a stable vehicle such as gold, they must look elsewhere. Since stocks and corporate bonds expose the investor to greater risk and volatility, people have two options: government bonds or the US dollar, both of which benefit the government.

The government has shown that it is no longer necessary to openly issue an order such as 6102 to prohibit the holding of gold. Simply reduce the desirability of 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 simplifies the purchase of its underlying assets. For example, if you buy the SPY ETF, you can have exposure to the hugely popular S&P 500, without buying 500 individual stocks.

The futures market on its own is nothing to worry about, but when the SEC prevents companies and individuals from buying BTC through regulated means, only allowing futures ETFs, we have a problem. .

Let me explain.

Companies in the Bitcoin industry have been asking for a “Spot Bitcoin ETF” for many years, but to no avail. If this spot ETF were accepted, you could invest $100 in the ETF, which would then buy $100 worth of bitcoin held by the fund, giving you direct exposure to bitcoin. This would provide pension funds, corporations, asset managers, etc. with easier access to bitcoin. But it’s not yet available in the US; only a futures ETF is.

If not already evident in the explanation of gold futures above, this may pose a threat to bitcoin.

When someone buys a bitcoin futures ETF, they don’t own bitcoin. Instead, they hold exposure to an ETF that holds bitcoin futures. In short, this futures ETF buys contracts for the delivery of bitcoin at a future date. As that date approaches, he initiates the futures contract, selling the old contract and buying a new contract later.

Don’t worry if you don’t fully understand how these ETFs work. The goal here is not to understand the functionality but rather the drawbacks.

It is essential to understand two characteristics of futures ETFs compared to 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 more you want to lock in a price in the time, the more premium you pay. Each time the contract is rolled, more premium is paid. This is called roll yield.

Even if the price of bitcoin stays the same for the duration of the futures contract, the value of the ETF will continue to fall because the ETF pays a premium to buy the right to buy bitcoin in the future. As that date approaches, he sells the contract and buys a new one later in time. This is called rolling.

A by-product of this rollover is that any premium paid decreases as contract expiration approaches (rollover yield). This creates a drop in the value of the ETF and is incredibly unfavorable for long-term holders.

As a result, this decline encourages short-term trading, increased volatility, and shorting the ETF as a portfolio hedge, suppressing the price.

Is it possible to see the effects of these futures ETFs in action? Below is a painting by Willy Woo. The approval date for the first futures ETF was in October 2021.

(Source)

Immediately before the creation of the first regulated futures ETF, we saw a huge increase in futures dominance. The futures market currently dictates 90% of the bitcoin price (green line in the chart above).

In summary, much like gold from the 1930s to the 1970s, individuals and businesses had no regulated means of buy bitcoin efficiently for long-term storage. The only difference being the age of censorship, rather than openly suppressing what the government considers unfavorable or infringing on certain aspects of the economy, it can suppress them covertly. However, all hope should not be lost.

Many people and companies are relentlessly pushing for the approval of a spot ETF as a way to gain direct exposure to bitcoin. But this begs the question: is bitcoin one of the last bastions of the free market and self-sovereign individuals, or is it already under the thumb of central planners?

This is a guest post by Seb Bunney. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.