Bitcoin, Gold, and Stocks: Where Is The Real Risk?

Introduction – Bitcoin, Gold, and Stocks (0:00)

Brian: A lot of people think Bitcoin and gold are a lot like stocks and they try to compare all three, but that kind of thinking could cost you big time. Today, we’re going to look at how these assets work and some key differences and risks that you might not be aware of.

How Bitcoin Works (0:14)

Brian: First, it’s important to know how each of these types of investments work. Bitcoin is not controlled by a bank or a government. It’s thousands of independent computers that run the system together. Bitcoin’s value is tied to its scarcity, its network adoption, and its market confidence. So, let’s break each of these down. First, scarcity. There’s only ever a hard-capped set amount of Bitcoin that’s available, which makes it attractive to those that are optimistic about Bitcoin’s use in the future. If a limited supply of something becomes more useful, its value will increase. Next, let’s talk about network adoption. If Bitcoin becomes more widely accepted and in demand in the future, its value will likely increase, driven in part by its built-in scarcity.

Brian: Bitcoin does not represent ownership in a business, does not produce earnings, and does not even generate cash flow. Because of this, the primary way its value is realized for the typical investor is when someone comes along after them and is willing to pay even more. This process is called capital appreciation. And look, I’m going to go ahead and tell you I put this in terms of speculative capital appreciation.

How Gold Works (1:18)

Brian: Gold is often compared to Bitcoin, and we’ll get into that comparison in just a minute, but it has a few key differences. Gold is a physical commodity with scarcity. Obviously, there is a physical limit to the amount of gold on Earth, and it can’t be manufactured. Gold stockpiles exist worldwide with supplies growing approximately 1 to 2% annually through mining. Historically, gold has been used as a form of money for as long as we’ve had world currencies. It’s used today as a combination of material use. It’s usually used in jewelry or electronic components and demand from investors and institutions such as central banks, the latter of which actively accumulate gold for their governments.

Brian: Proponents of gold investing will often promote its use as a store of value, meaning that as a precious metal, gold has historically been able to hold its purchasing power over long periods of time and is less dependent on the policies, the stability, or even the creditworthiness of a single government or currency. And it is this store of value characteristic of gold that most often draws comparisons to Bitcoin. Both are considered inflation hedges because both are scarce, independent of government control and again primarily used as stores of value. Many people liken Bitcoin to a form of digital gold and gold is also subject to that speculative appreciation I talked about like Bitcoin which compounds the comparison. While gold can be bought and sold all around the world, it still requires that transaction, someone coming along behind you and paying even more to realize that increased capital appreciation.

How Stocks Work (2:52)

Brian: Then we have stocks, equity or ownership that you purchase in existing companies. As companies grow earnings or are expected to do well in the future, you know, you can consider innovation, adding a new product line as an example, the prices of those companies’ stocks could rise and with it the value of your investment. The critical difference between assets like Bitcoin and gold and even stocks is the source of value. Bitcoin and gold do not generate earnings and do not produce cash flow. Their value is determined primarily through scarcity and the perceived desirability of that scarcity. And that desirability must increase in order for you to make money.

The Fundamental Difference: Stores vs. Creators of Value (3:30)

Brian: Stocks behave differently. This is the part I need you to lean into because they represent ownership of productive businesses. And those businesses can generate profits, produce cash flow, pay dividends, and reinvest earnings to grow future value. And even if no one ever came along behind you to pay more for it, a stock could still deliver returns through dividends, buybacks, or growing earnings that accrue to owners. The buyer coming behind you is not the sole mechanism of return. This gets at the fundamental difference between these two types of assets. Bitcoin and gold are stores of value whereas stocks are creators of value.

Bitcoin’s Risks (4:12)

Brian: But as with any investment, we have to consider not only the upside but also the risk. When it comes to Bitcoin, beyond the previously discussed speculative capital appreciation, its returns are punctuated by very large volatile swings. Throughout much of Bitcoin’s history, we have seen prolonged and frequent drawdowns, declines from prior highs of 40%, 50%, and sometimes over 70%. As an investor, you have to be honest with yourself and ask whether you truly have the stomach or the cash reserves to endure periods like this. If you watched an investment drop 70%, would you stay disciplined or would you panic and sell at the worst possible time?

Brian: The risk becomes especially important for those nearing or entering retirement where you encounter what is known as sequence of returns risk. This means experiencing large losses, especially in the early years of retirement. If a significant portion of your portfolio is in Bitcoin and it suffers a major price correction near retirement, the impact on your long-term financial security could be catastrophic.

Gold’s Risks (5:15)

Brian: With gold, one of its primary risks is that its role as store of value comes with a few real trade-offs that we need to talk about. First, let’s talk about keeping gold secure. You either have to take steps to fortify and protect your physically held gold or pay someone to keep your gold safe. An ounce or two, this may seem like nothing, but if you’re a heavy six or seven figure investor, this can get expensive quickly. Second, let’s talk about returns. From roughly 1928 through 2024, gold’s average annual return has been just over 5%. While the S&P 500 and small cap stocks have produced average annual returns closer to 10 to 12% over the same period. Over longtime horizons, that gap translates to immense differences in value.

Brian: There’s also the risk that gold may not be the attractive future investment many claim it will be. In scenarios of true systematic instability, the world is falling apart around us. Assets like food, water, safety, and shelter are going to be far more likely to matter than ownership of a physical metal. Gold may preserve value in financial terms, but it does not solve every real-world risk.

Stock Risks and Index Fund Solutions (6:25)

Brian: Stocks, of course, they’re not immune to risk either. No investment is. It’s that whole risk-reward thing that we deal with. Companies can fail, industries can decline, and economies can experience downturns. One solution we strongly favor and personally use is index fund investing. Buying an index fund means owning a small slice of many companies. And these are real value creating assets within a defined market index rather than trying to pick individual winners. Because the fund simply mirrors the index such as the S&P 500, your returns closely track the overall market’s performance with minimal costs instead of attempting to outperform it. This approach avoids the structural disadvantages of active investing. Those include higher fees, increased trading costs, and selection risk. In effect, instead of trying to beat the market, you get to be the market.

Target Date Funds for Simplicity (7:16)

Brian: For those seeking even more simplicity and diversification, index target retirement funds can be a strong starting point. These funds automatically adjust their asset allocation as you approach retirement, requiring very little ongoing involvement. All you need to decide is how much you want to save and when you want to retire. If you can answer those two questions, you can set it and forget it.

Closing: Small Allocations Are OK (7:38)

Brian: If Bitcoin gives you excitement about the future of finances or gold provides peace of mind as a long-standing store of value, there may be nothing wrong with allocating a small portion of your portfolio to these types of investments. But don’t sacrifice your financial future by putting all your eggs in one basket without understanding these key differences and risks involved. As with any investment, it’s crucial to assess not only how attractive the upswings are, but how much their downsides could cost you, too. If you want to know more about investing, click right here. And as always, keep building towards your great big beautiful tomorrow.