It was 2020, and there were countless stories of young investors becoming millionaires overnight by investing in cryptocurrencies like Bitcoin. I didn’t want to miss out, so I decided to invest a modest amount of 2500 euros.
Curiosity
The possibility of becoming a millionaire was enticing, but I also saw this as a way to educate myself about a ‹new› concept called blockchain. This technology was the foundation of cryptocurrencies and was set to transform countless industries.
Blockchain was described as ‹a new paradigm of transaction execution› that would eliminate the need for middlemen. The ability to remove middlemen was going to reduce costs and allow people and businesses to transact directly with each other — a revolution for citizens and the economy.
Counterintuitive
Learning about the blockchain was absolutely fascinating but also counterintuitive. The more I learned, the less I understood. It was very challenging to comprehend concepts such as blocks, cold wallets, and cryptography, yet I persevered.
My curiosity was mainly piqued by the use of cryptography to secure transactions. It was a genuine joy to learn about how public-private keys could encrypt messages and be used to verify ownership of assets. Perhaps blockchain could be the future.
Middlemen
Unfortunately, my initial enthusiasm quickly dissipated. While it seems intuitive to remove middlemen from every transaction possible, I questioned whether this was always desirable. Middlemen have existed for centuries, and this was surely not only because blockchain had not been invented yet.
Ultimately, every transaction requires some type of dispute resolution mechanism and an entity that can enforce a decision. For example, if I transfer money to the wrong bank account, I can rely on the banking network to rectify the mistake and update the records.
This would not be possible if I transfer Bitcoin erroneously, as data on the blockchain is immutable. This means that my mistake can only be reversed if the wallet I sent Bitcoin to erroneously decides to send it back. However, there is no way to ‹force› them to return the Bitcoin.
Middlemen help us correct mistakes and settle disputes. They are needed.
Use Cases
Overall, my favorite use case for blockchain was cryptocurrencies. There is something extremely satisfying about being able to send funds (anonymously) to someone without relying on a bank. However, this is primarily useful for illicit or covert activities.
For all other use-cases, I believe that existing technology and databases are much better at executing transactions than the blockchain and have the benefit of not being immutable. When mistakes are made, we need someone who can correct them for us.
Losses
Instead of losing 2000 euros by investing equally in Bitcoin, Ethereum, Polkadot, and Shiba Inu, perhaps I should have invested in crypto exchanges, graphic cards, data centers, etc. Essentially, anything that was supporting crypto infrastructure (i.e. companies making pick-axes). Surely, I would not have lost money.
It was important for me to have skin in the game to learn about blockchain. It is highly technical and uses its own vocabulary, making it hard to understand, yet I find it fascinating. According to advocates, its main premise is to eliminate middlemen and central authority. I am not sure if that is a desirable outcome.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft Luxembourg.
