*This article was originally written for Seb Bunney’s weekly newsletter exploring what it means to be free in an increasingly not-so-free world. If you find it interesting, subscribe for free here: The Qi of Self-Sovereignty.
“History never repeats itself, but it does often rhyme.” – Mark Twain.
Lately, I’ve been pondering whether we are witnessing a rhyming of history.
For those who have had the chance to dig into our monetary history, you may or may not have encountered a little-known event called Executive Order 6102.
I say little, but in reality, it was a momentous attack on the sovereign individual and the free market. An event that corralled US citizens away from gold and into the US dollar and assets from which the US government benefits.
What is this Executive Order 6102?
During the Great Depression, President Franklin D. Roosevelt issued Executive Order 6102 on April 5, 1933, “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.”
At that time, the Federal Reserve Act of 1913 required any newly issued dollar bills to be 40% backed by gold. This order freed the Federal Reserve from this restriction as they could coercively obtain more gold than they otherwise would have been able to.
Moreover, pushing people out of gold and into US dollars helped strengthen the US dollar during a period of monetary expansion and central bank intervention.
This Executive Order was in effect until December 31, 1974, when congress legalized private ownership of gold coins, bars, and certificates, once again.
With an understanding of executive order 6102, I wanted to shed some light on modern government thinking.
In the eye-opening book, “Mr. X Interviews: Volume 1,” the author, Luke Gromen, takes the reader on a journey through our past, present and future macroeconomic environment. Although the book details many captivating events, one, in particular, stood out to me.
He cites a leaked document from the US State Department dated December 10, 1974. Here is an excerpt from that document:
“To the dealers’ expectations, will be the formation of a sizable gold futures market. Each of the dealers expressed the belief that the futures market would be of significant proportion and physical trading would be miniscule by comparison. Also expressed was the expectation that large volume futures dealing would create a highly volatile market. In turn, the volatile price movements would diminish the initial demand for physical holding and most likely negate longterm hoarding by US citizens.”
Not quite sure what’s going on?
Essentially, the government knew that by promoting the gold futures market, gold would experience a significant increase in price volatility, diminishing 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 such as gold, they must look elsewhere.
With equities and corporate bonds exposing the investor to greater risk and volatility, people have two options: government bonds or US dollars, thus benefitting the government.
The government has shown that it no longer needs to overtly issue an order such as 6102 to ban the holding of gold. It just needs to reduce gold’s desirability to achieve the same effect.
Tying this back to the intro quote, “History never repeats itself, but it does often rhyme”
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 purchasing of its underlying assets. For instance, if you purchase the “SPY” ETF, you can own exposure to the hugely popular US index, the S&P 500, without purchasing 500 individual stocks.
On its own, the futures market is no cause for alarm. But when the SEC prevents corporations and individuals from purchasing BTC through regulated means, only allowing futures ETFs, we have an issue.
Let me explain…
The Bitcoin community has been hoping for a “spot Bitcoin ETF” for many years but to no avail. If this becomes available, you invest, say, $100 into the ETF, which purchases $100 of Bitcoin, giving you direct exposure to Bitcoin. This would provide pension funds, corporations, asset managers etc., easier access to Bitcoin. But this is not yet available in the US, only a futures ETF.
If not already evident from the gold futures explanation above, this may pose a threat to bitcoin.
When we purchase a Bitcoin futures ETF, we do not own bitcoin. Instead, we own exposure to an ETF which holds bitcoin futures contracts.
*Foreword: Don’t worry if you don’t quite understand how these ETFs work. The point here is not to understand the functionality but rather the drawbacks.
In short, this ETF purchases contracts for the delivery of bitcoin at a future date. As that date approaches, it rolls the futures contract, selling the old contract and purchasing a new contract further out.
It is essential to understand two characteristics of futures ETFs over spot ETFs:
If you want the right to buy something at a specified price in the future, in regular functioning markets, you pay a premium over today’s price, and the further out in time you wish to lock in a price, the more premium you pay. Each time the contract is rolled, more premium is paid.
Even if bitcoin’s price stays the same throughout the life of the futures contract, the ETF will still decline in value. Why? The ETF is paying a premium to purchase the right to buy Bitcoin in the future, but as that date nears, it’s selling the contract and purchasing a new one further out in time. This is known as rolling.
A byproduct of this rolling is that any paid premium diminishes as contract expiration approaches (roll yield). This creates a decay in the value of the ETF of around 28% per year. Incredibly unfavourable for long-term holders.
As a result, this decay incentivizes short-term trading, increasing volatility, and short selling of the ETF as a portfolio hedge, suppressing the price.
*Check out this article for more information on how these Bitcoin futures ETFs work.
You may be wondering, is it possible to see the effects of these futures ETFs in action?
Here is a chart from Willy Woo, and I have added the date of the approval of the first futures ETF.
Immediately preceding the inception of the first regulated futures ETF, we saw a considerable 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 30s to the 70s, individuals and corporations alike have no regulated way to purchase Bitcoin efficiently for long-term storage.
The only difference being in the age of censorship, rather than overtly suppressing what the government deems as unfavourable or infringing aspects of the economy, it can covertly suppress them.
However, not all hope should be lost.
Many people and corporations are tirelessly petitioning for the approval of a spot ETF, a way to gain direct exposure to Bitcoin.
But this does beg the question, is Bitcoin one of the last remaining bastions for free market self-sovereign individuals, or is it already under the thumb of the central planners?
*This article was originally written for Seb Bunney’s weekly newsletter exploring what it means to be free in an increasingly not-so-free world. If you found it interesting, subscribe for free here: The Qi of Self-Sovereignty.