Missed Opportunity: What You Lost by Not Investing in Bitcoin or Real Estate [5-Year Analysis]

Bitcoin and other such cryptocurrencies have proven to be ineffective as mediums of exchange for conducting financial transactions. However, Bitcoin’s volatile value, which changes substantially from day to day, renders it an unviable medium of exchange. In addition, transactions using the cryptocurrency are slow and expensive. The Bitcoin network also cannot process large transaction volumes in a timely manner.

Interestingly, while it has failed in its stated objective as a medium of exchange, Bitcoin has turned into a speculative financial asset. Early investors in Bitcoin and other cryptocurrencies have certainly made substantial gains. However, since Bitcoin is a purely digital object with no intrinsic value, its price is largely determined by investors’ faith, which could prove fragile. Hence, early investors would do well to cash in at least some of their gains and move it to more reliable investments, perhaps including real estate. New investors should be wary of jumping on the bandwagon at this stage because of the significant downside risks.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

In principle, Bitcoin allows transactions to be conducted without relying on central bank money or the services of a bank or other financial institution. The process by which the Bitcoin network validates transactions is a technological marvel. But it is also hugely energy intensive because it relies on vast amounts of raw computing power, implying high levels of electricity consumption. These adverse environmental consequences have created a backlash against cryptocurrencies, with countries such as China banning them altogether.

Whatever the eventual fate of Bitcoin, its underlying technology—referred to as blockchain--is evolving in promising directions. A new breed of cryptocurrencies called stablecoins attempts to fix the problem of unstable value. They are backed by reserves of existing fiat currencies such as the US dollar and have the potential to provide low-cost and easily accessible digital payments within and across national borders.

Blockchain technology might also one day allow a broad range of commercial transactions, including real estate transactions, to be conducted more cheaply, quickly, and efficiently, and without the use of intermediaries such as attorneys and settlement companies.

It is not the first time in history in which nations have adopted monetary systems in which two or more "currencies" were accepted as legal tender. For example, Alexander Hamilton proposed and supported a bimetallic monetary system in which both gold and silver were to be used as legal tender and whereby an exchange rate would exist between the two. This led to the passage of the Coinage Act of 1792 which allowed for the exchange of gold and silver. The passage of the Coinage Act of 1873 ended bimetallism in the United States, although throughout the 19th century, several other countries adopted some form of bimetallism.

While bimetallism may seem like something from a long time ago, it shows that it is something that others before us have explored and something which is (sort of) being introduced again in our time period. One of the major differences, however, is that gold and silver are depletable and scarce, while new cryptocurrencies can be created and launched relatively easily with the technology we have today. Currently, and unbeknownst to many market observers, there are thousands of cryptocurrencies in circulation across the various cryptocurrency platforms and exchanges. Only a few are well known, such as Bitcoin and Ethereum, given their large user base.

Another major difference between bimetallism and cryptocurrencies was that governments used authorized Mints where persons can go to exchange their silver and gold bullion for minted coins of the same weight. Most governments today, however, do not recognize cryptocurrencies as legal tender. El Salvador is an exception. This country adopted bitcoin in hopes of having a stable currency to use as legal tender. Apart from countries, there are major companies that accept some form of cryptocurrency (mostly Bitcoin) for certain transactions (notable examples include Microsoft and AT&T).

So, will this become mainstream? Depending on who you ask, you will get very different answers. Even the question of bimetallism, something that seemingly happened a long time ago, can spark deep debate among economists even today. In my estimation (and this is my view), there is a very low probability that cryptocurrencies will become mainstream. I hold this view for the following reasons:

1. As mentioned, there are thousands of cryptocurrencies in circulation and many pump-and-dump groups which attempt to take advantage of the prices of newer (young) cryptocurrencies. This type of market behavior can tarnish the image of cryptocurrencies.

2. Central banks around the world have expressed that cryptocurrencies cannot serve the function of money for a variety of reasons. The two primary reasons are that their price behavior is too volatile and unpredictable, and, it has yet to be identified how their fundamental value can be measured. In light of this, it seems that central banks are, on an international level, discussing the prospects of issuing central bank digital currencies (CBDCs). There thus appears to be a nontrivial divergence in attitude regarding digital money between governments and regulators on the one hand, and the private sector on the other.

3. Contrary to public perception, bitcoin transactions are not entirely anonymous (anonymity is touted as one of the biggest advantages). In addition, and if in fact we do move toward a CBDC, there are many privacy implications associated with this that need very serious discussion.

4. Again, contrary to public perception, Bitcoin's price movement is not immune to what is happening in our macroeconomy. In a paper I published in the Annals of Operations Research in 2020 titled, "Market Risk and Bitcoin Returns," I show how a 'black swan' type of event (like a 2008-09 market crash) can seriously and negatively impact Bitcoin's value.

Certainly not in their current shapes and forms. First of all, "first-generation" cryptocurrencies that are based purely on distributed ledgers like Bitcoin, Litecoin, etc., are by construction not able to scale up to the volume of mainstream use. Bitcoin for instance can support at most 7 transactions per second, a puny amount compared to the hundreds of thousands supported by the VISA network at a tiny fraction of the energy usage. Additionally, as these cryptocurrencies have no intrinsic value, they are subject to wild swings in investor sentiment and therefore high volatilities, which defeats their very purpose of being used as a payment option. As a result, nowadays they are treated mostly like gold 2.0 - a digital store of value that is mostly traded and held for speculative purposes.

The next generation of cryptocurrencies, such as stablecoins, eliminates the second limitation by pegging their value to a fiat currency, usually the dollar. However, most of them are launched as "dapps" that run on the Ethereum blockchain, which is still subject to the same energy and capacity limitations similar to the Bitcoin blockchain network. Because of this, transaction fees are large on these networks, making them a poor choice for everyday, high-volume, low-value transactions. In addition, most of the stablecoins are launched by entities that are, to put it mildly, of questionable integrity, and because these "currencies" are not regulated in any shape or form (unlike PayPal deposits, for instance, which are FDIC-insured), users of these stablecoins run the risk of losing the entirety of their holdings.

This makes crypto a poor choice, particularly for large-value transactions e.g., in the real estate space. As a result, recent research (such as one that we've done here at the University of Michigan) indicate that the majority of the current blockchain activities are not done for utility purposes (e.g., actual payments) but rather for speculation. In fact, actual as-originally-intended usage of the blockchain products has declined by 90% since 2017, being replaced by speculative transactions.

As a result, I do not believe that our economy is anywhere near ready for crypto-based payments, certainly not when we have plenty of other non-crypto fintech innovations in scalable, safe, and efficient digital payment options (from PayPal & Apple Pay to Square & Stripe to central bank digital currencies).
Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

This is certainly an issue, but in light of the much bigger hurdles outlined above, I don't think it's a key impediment to broader adoption of crypto payments. The sustainability issues stem from the fact that the blockchain data reconciliation process, where many potentially different copies of data received by different network nodes (miners) are periodically reconciled into a single "master copy", requires a computationally-intensive "proof-of-work" process.

This could theoretically be addressed quite easily with alternative data reconciliation methods such as proof-of-stake, which does not require any physical resource and is purely crypto-based. Ethereum is in the process of shifting to proof-of-stake but this has proved to be a slow and painstaking process.

But in any case, this is a technical hurdle that can always be overcome with better technology. The biggest hurdles that I see to greater crypto adoption into the mainstream - scalability, volatility, lack of regulation and trust, information asymmetry, etc. - are economic in nature, which are much more difficult to overcome.

After rapid growth, the current market cap of cryptocurrencies is above $2.5T which is more than the U.S. dollar or Euro notes and coins in circulation. In addition to possible systemic risks to the global economy, an obvious consequence is that merchants are looking into ways of adding the most notable cryptocurrencies as accepted forms of payment. However, the digital asset scene is complex. Not all digital assets that may fall under the term "cryptocurrency" in everyday language are meant to be used as a form of payment, to begin with.

For customers, ease and cost of use are pivotal. The digital payment infrastructure for cryptocurrency is quickly evolving and it is already possible to use some of the largest cryptocurrencies to purchase practically any fiat-denominated product or service through payment processors that convert the currency in real time. Consequently, some cryptocurrencies can be used as a form of payment already, now almost anywhere. That said, the extreme volatility we have seen with several major cryptocurrencies is a complicating factor for both merchants and consumers.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

Not at all. The technology behind the Bitcoin blockchain is over 10 years old and rightly blamed for its excessive energy consumption. However, there are multiple newer sustainable and energy efficient technology solutions for operating a cryptocurrency system.

Really, cryptocurrencies don't have to become fully mainstream to be very impactful and important. It's enough for them to fulfill some important use cases for people who really need it!

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

Sure, possibly. The good thing is that many (I think most) new cryptocurrencies are based on proof of stake and don't have an environmental concern.

Without clear guidance from regulators in the US and worldwide, cryptocurrencies are never going to be more than a niche investment for people willing to take risks -- and the risks are considerable! In the real estate market, we're beginning to see startups offering mortgage loans based on borrower's crypto holdings as collateral. But this kind of arrangement only works insofar as crypto assets are a stable store of value, which they are not, and which they won't become absent regulatory clarity.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

The sustainability question is real, and not just for crypto but for pretty much everything we're coming to depend upon in our machine-learning, AI-driven, internet of things world. Addressing the enormous energy consumption of cryptocurrencies has to be part of the legal and policy discussion as part of a broader look at the energy required for all computationally intensive processes.

Cryptocurrencies will become mainstream only if people find them better than the current payment and financial system. How easy are they to use? How quickly do they process payments? How cheap/expensive are they? Blockchain is still a new technology and plenty of improvements are expected in the future. The overall efficiency of the crypto space when it becomes mature will determine whether they will be mainstream or not.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

A lot of effort is being put to make cryptocurrencies less carbon-intensive. The transition from proof of work to proof of stake will reduce the impact of cryptocurrencies on the environment and become less of an issue.

I most certainly believe cryptocurrencies will become mainstream. This phenomenon is already happening. See, for example, the case of El Salvador, where Bitcoin is officially legal tender. In the U.S., cryptocurrencies are already accepted by some tech companies, such as Microsoft (Xbox Store) and Best Buy, and major retailers, such as Home Depot and Whole Foods.

Nonetheless, there are still several obstacles cryptocurrencies face before becoming mainstream. First, there are regulatory and legal issues surrounding the nature of cryptocurrencies. For example, it may be a challenge for institutions to comply with know-your-customer and anti-money laundering regulations. Second, and perhaps more importantly, cryptocurrencies are still very technical in nature. The idea of using wallets and managing cryptographic keys is too foreign to many clients. The positive news is that both regulators and the industry are working intensively to overcome the above barriers.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

It is important to clarify that not all cryptocurrencies are equal and, consequently, not all cryptocurrencies are energy-intensive. Take Bitcoin, for example, the number one villain when it comes to cryptocurrencies facing sustainability issues. Bitcoin is so energy-intensive because it relies on a technique called “proof-of-work” to function. However, the platforms behind other cryptocurrencies, such as Ethereum, EOS, Algorand, to name a few, rely on an alternative technique called “proof-of-stake,” which is considerably less energy-intensive and much more efficient.

That said, I do not believe sustainability issues will prevent cryptocurrencies from gaining traction. On the contrary, due to increased pressure, I believe cryptocurrencies might foster investments in green energy. For example, going back to El Salvador, the country is harnessing green geothermal energy for Bitcoin mining from a plant at the base of a volcano.

Yes, cryptocurrencies will become mainstream, and it will not take much time. It took 200 hundred years for half of the US population to learn to buy stock. Crypto markets are open 24/7, that is they are operational 4 times longer every week than conventional markets. We are witnessing a mass adoption of cryptos all around the world and this will go on for another decade. We also see that institutional investors are moving to cryptos at an unprecedented speed. SEC has already approved exchange-traded funds that mimic crypto prices in stock markets.

Are we ready for this? Our economies are not too external to cryptos, and we cannot say whether economies are ready or not. Because our economies are changing with crypto interventions, in the first place. The crypto space is now around 2 trillion dollars, and it is growing. It is larger than 90% of national economies. Cryptocurrency is, in reality, data Money: we monetize the right to send data privately in a public space. We do this with the new accounting systems of blockchains.

In the future, we will see a proliferation of data monies and more adoption of them. In this process, we may expect to observe bullish markets, i.e., prices will go up, because more and newer people will be buying cryptocurrency. And they buy with dollars or euros, so they contribute to dollarization too. What we are observing is not cryptos becoming alternative to fiats - they are diversifying the monies we use.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

Sustainability is a very valid concern for the case of the Bitcoin blockchain and its users. In the long run, looking at the poor financial services Bitcoin provides, it is hard to believe that people will not be looking for alternatives. They have already begun. We see that people are moving toward Ethereum because it has a more developed, faster, and environmentally more responsible blockchain. These second-generation blockchains may replace the first generation blockchain of Bitcoin.

Finally, in the last three years, we witnessed the emergence of third-generation blockchains that can operate interchain networks. They don’t burn much electric power, they are super-fast, easy, and cheap to use. Their material service is way more effective and economical than Bitcoin and Ethereum blockchains combined. So, third-generation platforms like Avalanche (AVAX) or Polkadot (DOT), will be the new Bitcoins of the future.

I do believe cryptocurrency has a great potential to become mainstream in the property sector. In fact, we have already started doing some pilot projects in Australia to use blockchain technology in the Australian property market. There are two things that blockchain can help with:

First, it can help to automate the complicated transaction and regulatory process through smart contracts. Both the residential and commercial markets can benefit. It is also one of the use cases in the "RegTech" sector.

Second, by its token economy, the blockchain in the property sector itself can also be used as an automatic and trusted payment platform. That can further boost the usability of blockchain in the property sector, as it usually involves lots of financial transactions all the time.
Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

No. Only the "first-generation" blockchain systems such as Bitcoin, use the "energy-wasting" consensus mechanism called proof-of-work. The newer generation blockchain systems such as Algorand, are using another consensus mechanism called proof-of-stake which is much cleaner and environmentally friendly, and that can also support a much higher throughput, which means more transactions at the same time.

So, it is a general misconception that blockchain or cryptocurrencies are not sustainable or environmentally friendly, but in fact, only those first-generation blockchain systems using proof-of-work belong to this category, while the next generation blockchain systems using other kinds of consensus mechanisms are more sustainable.

Cryptocurrencies are already mainstream, but not for retail use by most vendors and clients. Cryptocurrencies are – by law, and by consumer practice – assets, or commodities. Whose value depends on supply, and demand. As Bitcoin’s design limits the creation of more than a little over 21 million Bitcoin, ever, there is built-in scarcity which drives prices higher if demand increases. Other cryptocurrencies, I caution readers, are far more inflationary and many are outright scams. Like the recently created Squid Games-related coin, whose creators then closed up shop absconding with a lot of other people’s money - that is dollars or bitcoins.

Wider retail use of an asset/commodity that is by nature subject to wild price swings suggests that their use in retail commerce, as is now the law of the land in El Salvador, will not be swift, or necessarily widespread. This is not to say people will not be able to buy crypto ETFs, or use them to buy NFTs, or other cryptocurrencies. On the other hand, stablecoins and central bank digital currencies – these will both become widespread/mainstream and used for retail transactions, worldwide.

Finally, while we can say that, for example, the states of New York, and Wyoming, are ready for this from an institutional/state regulation point of view, the US federal government executive branch agencies and regulatory bodies, not to mention Congress, are badly lagging compared to most other nations in the world. When the Eastern Caribbean, and El Salvador, are the interesting policy places to keep an eye on in our hemisphere, not D.C., I think we, in the U.S., have a problem. The U.K. and other nations, and the state of California, have blockchain roadmaps to begin to guide policymakers and the public. The U.S. has people feverishly speculating, not investing – in all manner of digital assets, without a clue whether they are real or, like the Squid Games disappearing coin, a complete scam. Mega-wealthy/influential hypesters like Elon Musk add to the noise but not to public understanding or to federal policy change.

Do you believe sustainability issues could stop cryptocurrencies from gaining traction?

No. More than 50% of Bitcoin miners today are utilizing renewable energy resources for their production facilities, and that percentage will continue to grow. For example, CoinMint, in upstate New York, is all hydro- and solar-powered for its largest in North America, and perhaps the world, Massena, NY digital currency data center.

Furthermore, China’s 2021 crackdown/banning of crypto miners has had the fortunate side-effect of rapidly reducing the dependence of the entire cryptocurrency ecosystem on dirty coal. Moreover, Ethereum, the #2 crypto, is in the process of switching from energy-intensive proof of work mining to a proof of stake consensus/transaction verification process, which will radically reduce energy use by the Ethereum community.

Finally, much faster, and cleaner/greener low-energy use blockchain and cryptocurrency systems already exist and are gaining in use. See, for example, VMware Blockchain, and Avalanche, currently the #14 cryptocurrency.