What if the Stock Market Falls 30%?
Audio Brief
Show transcript
This episode features Ben Carlson, Duncan Hill, and special guest Eric Balchunas, discussing Bitcoin ETFs, economic indicators, and strategies for market downturns.
There are four key takeaways from this conversation. First, for most investors, a Bitcoin ETF offers a simpler, more secure way to gain exposure than direct ownership. Second, do not treat single data points like falling gas prices as definitive economic forecasts. Third, market declines can be reframed as valuable buying opportunities for long-term investors. Finally, comprehensive financial planning is crucial for high-net-worth individuals, not just those starting out.
The discussion highlighted the advantages of a Bitcoin ETF over direct ownership. ETFs typically involve lower transaction costs, tighter bid-ask spreads, and institutional-grade security, offering peace of mind. Direct ownership on crypto exchanges often includes higher, less transparent fees and requires self-custody, which carries risks like scams.
Single data points, such as falling gas prices, should not be taken as definitive economic forecasts. While gas prices can fall during recessions due to decreased demand, they can also signal a supply glut, as seen with record U.S. oil production. Understanding the underlying cause is more critical than the price change itself, as a supply glut is generally positive for consumers.
For long-term investors utilizing dollar-cost averaging, a significant market downturn can be reframed as "time traveling" back to a price level from the recent past. This perspective transforms a potential negative into a positive buying opportunity, allowing investors to acquire assets at previously seen lower prices.
The episode also emphasized that financial advice is crucial for high-net-worth individuals. Wealth management services are designed to consolidate diverse investments, such as whole life insurance, 401(k)s, and taxable accounts, into a single, goal-oriented plan. This holistic approach incorporates essential tax, estate, and insurance planning.
This episode offers practical insights for navigating complex financial topics, from new asset classes to personal wealth management.
Episode Overview
- Ben Carlson and Duncan Hill host the final episode of the year, answering listener questions on various financial topics while wearing festive holiday sweaters.
- They are joined by special guest Eric Balchunas from Bloomberg Intelligence to break down the advantages of buying a Bitcoin ETF versus purchasing Bitcoin directly on an exchange.
- The hosts discuss whether a crypto crash could cause a stock market crash, if low gas prices signal a recession, and how to mentally frame a potential 20-30% market decline.
- The episode concludes by addressing a question from a high-net-worth individual who feels financial advice doesn't cater to their situation, highlighting the need for a cohesive financial plan.
Key Concepts
- Bitcoin ETF vs. Direct Ownership: The episode details the trade-offs between the two methods. Buying a Bitcoin ETF in a brokerage account typically involves lower transaction costs (tighter bid-ask spreads) and a simple annual expense ratio. Buying directly on crypto exchanges often includes higher, less transparent fees and spreads. ETFs also offer institutional-grade security and peace of mind, whereas direct ownership requires self-custody, which carries risks like scams or physical theft.
- Crypto and Market Correlation: Bitcoin and other cryptocurrencies are treated as "risk-on" assets, often correlating with speculative, non-profitable tech stocks. However, the hosts argue that the crypto market is not large enough to cause a systemic stock market crash; rather, a stock market downturn is more likely to cause a crypto downturn as investors shed risky assets.
- Gas Prices as an Economic Indicator: While gas prices often fall during recessions due to a drop in demand, low gas prices are not a definitive signal of an impending recession. They can also be caused by a supply glut, as seen with record U.S. oil production, which is a net positive for the economy and consumers.
- "Time Travel" Reframe for Market Declines: For a long-term investor who is dollar-cost averaging, a significant market downturn (e.g., 30%) can be reframed as "time traveling" back to a price level from the recent past (e.g., 1-2 years ago). This perspective turns a potential negative into a positive buying opportunity.
- Financial Planning for High-Net-Worth Individuals: The hosts challenge the idea that financial advice is only for those with less than $100k. They explain that the wealth management industry is specifically structured to help high-net-worth individuals consolidate a "hodgepodge" of investments (whole life insurance, 401(k)s, taxable accounts) into a single, goal-oriented plan that incorporates tax, estate, and insurance planning.
Quotes
- At 03:59 - "Is there any downside to buying a Bitcoin ETF in a brokerage account rather than buying Bitcoin itself on Coinbase? Is there any scenario where the price of the ETF and the coin itself are de-linked somehow?" - A listener question that frames the in-depth discussion on the practical differences between investing in Bitcoin via an ETF versus a crypto exchange.
- At 05:15 - "If you come from the TradFi world and you're used to like free commission-free trading and like tight penny-wide spreads, it's highway robbery." - Guest Eric Balchunas comparing the high, often hidden fees on crypto exchanges to the highly competitive, low-cost environment of traditional brokerage accounts and ETFs.
- At 17:15 - "Saw this tweet going around and wanted to get Ben's take. Do low gas prices always signal a recession?" - A viewer question prompting a discussion on why low gas prices are not a guaranteed recession indicator and can also be a positive sign of increased supply.
- At 21:16 - "But investing for more than 12 years already, I would think about this kind of decline as a 'time travel' back two or three years. Wouldn't this be a good thing?" - A listener, Boris, provides a powerful mental framework for long-term investors to view market corrections not as a disaster, but as a chance to buy at prices from the recent past.
Takeaways
- For most investors seeking Bitcoin exposure, using an ETF is likely the simpler, cheaper, and more secure option due to lower transaction costs and institutional custody, despite sacrificing the ability to self-custody.
- Avoid treating single data points like falling gas prices as definitive economic forecasts. The reason behind the change (e.g., supply glut vs. demand destruction) is more important than the change itself.
- If you have accumulated significant wealth across a variety of uncoordinated accounts (whole life, 401(k), taxable brokerage), it is crucial to engage a financial advisor to consolidate these assets into a single, cohesive retirement plan that aligns with your specific long-term goals.
