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Up and Up? The Stock Market vs. Bitcoin

Bitcoin as an investment is similar to other “nonproductive” assets like gold, silver, oil, or art.

For many people, the stock market is a big casino. Stocks go up, stocks go down, and there’s no telling when it will happen or why. That’s true to an extent, but unlike truly random processes, there are many forces at work that reliably pull stock markets upwards over time.

Bitcoin is an example of a market that does not work like stocks. While some have suggested “fundamental” reasons that crypto assets rise and fall, at the end of the day they go up because more people want to buy them, and they go down when more people want to sell them. Given the nature of Bitcoin and other cryptocurrencies, the main reason people want to buy them is because they speculate others will want to buy more in the future and the price will go up. This leads to a speculative cycle of ups and downs that is exhausting.

Bitcoin as an investment is very similar to other “nonproductive” assets like gold, silver, oil, or art. While they might appreciate over time because people either need them or want them, they exist only to be consumed or owned.

Supply and demand influences stocks as well, but there is much more going on behind the scenes when you think about investing in a publicly traded company.

One way to think about a stock is that it is a black box. To get it started, you have to open up the box and put some money (capital) into it. Then, as long as everything goes well, money starts coming out of the black box — like an ATM — over time. You’re not just getting your money back. Over time, you can take out a large amount of money as profit and that initial capital can grow far beyond the amount you put in.

The income that flows out of the black box of a publicly traded company is special. It tends to increase over time as productivity, population, and GDP grows. It tends to rise as inflation increases. It benefits from technological advancements. If you diversify into a lot of these different black boxes, they can be a pretty reliable way to make money in the long run, even if sometimes the money slows down or even stops for short periods of time.

There might be a lot of demand for Bitcoin in 10 or 20 or even 100 years — or there might not. It’s almost impossible to know whether or not interest will continue or the next big thing will come along and make it obsolete.

We can say with much more confidence that there will be interest in 100 years in stocks. Tastes change, but people are likely to always be interested in black boxes that create money! Black boxes of Bitcoin or gold might have more money in them when you open them in the future, but they don’t produce any sort of earnings.

There are no guarantees in investing — it’s easy to lose money in the short term. But in the long term, stock prices are not a random squiggle of lines representing a meaningless random process (like Bitcoin). There is an almost gravitational force that has pulled stock prices upwards over our lifetimes, and it’s likely those same forces will continue to pull stock prices up into our retirement years and beyond. Bitcoin, gold, oil, or art might make a lot of money for you, but in our opinion, a diversified portfolio prominently featuring stocks is the most reliable path to a secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at
ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.