5 min read

Intro to Cryptocurrency: The most annoying new financial thing

Intro to Cryptocurrency: The most annoying new financial thing

The Blockchain

A blockchain is a distributed ledger of transactions or some other sort of data. Lawyers call it "distributed ledger technology" since that's all it is, and that term better fits existing laws. If you think of a traditional bank with a centralized place where all the transactions and balances are stored, then think of cryptocurrencies as the opposite. Cryptocurrencies transactions and balances are entirely public, stored by people called miners worldwide instead of by a central authority.
Here's a regular money analogy that might help: Imagine if 50 people had a copy of your complete banking history that has 1,000 transactions on it. Since each person has a complete copy, each can 'predict' with some accuracy what the 1,001st transaction will be. Those who predict correctly receive a small reward for validating that 1,001st transaction. The transaction sender pays a small fee that serves as the reward. So in this analogy, the banking history is like a blockchain, the 50 people are like a mining community, and the 1001st transaction is the same - just a transaction on the ledger.
Where the word blockchain comes from is how those transactions are organized. Validating each transaction via the whole network would be a scalability nightmare. Instead, the mining community validates blocks or groups of transactions together at the same time. Once the community validates a block, That block of transactions gets added to a chronological sequence of blocks called a chain. Blocks of transactions on a chain = blockchain. Since blockchains are public, there are plenty of tools to explore any data in the blocks yourself. Going back to our analogy, every 20 transactions could represent a block. Once created, blocks are permanent and cannot be edited or removed

Intro to cryptocurrency of blocks on a blockchain
Intro to cryptocurrency of blocks on a blockchain

Mining and Staking

Mining and staking methods are two 'consensus mechanisms' for how all cryptos I know of support their transactions. Any coin (e.g., Bitcoin) uses one or the other, but not both. In most cases, mining and staking are the answer to "How does it work?" because without them, nothing would validate transactions on the blockchain.

Mining: aka Proof of Work. Mining uses high-end video cards and purpose-built machines called ASICs to compute an energy-intensive algorithm that validates new blocks of transactions. As a reward for mining, small rewards are paid out to the machines. I do a tiny bit of mining myself because my computer's video card was ultra high-end a few years ago. The Nvidia GTX 1080 video card in my desktop PC mines Ethereum (the #2 cryptocurrency) at about $50/month in profit. (Don't worry - I get all my electricity from solar and wind.) I can still browse the internet and watch videos and such while it is mining. For the purpose-built machines, A site called ASIC miner value keeps a running tally of how much the best purpose-built machines can make each day. As of this writing, the Goldshell KD6 machine makes $140/day in profit, which is over $50k/year. That's a full-time job! The catch is that (1) getting your hands on these machines is incredibly difficult and prone to scams, (2) the machines draw about 30x more power than your regular computer, (3) their fans are about 75 decibels, about the sound of a blender, and (4) the profitability can change on a moment's notice. So.. a bit risky. All ASIC manufacturers are based in China, where mining ironically is banned. Recently, American companies Intel and Block (formerly known as Square) have announced they will develop their own ASIC chips for mining.

ASIC crypto miner showing >$50k yearly in crypto estimated yield, intro to cryptocurrency
This purpose-built ASIC machine can plug into a wall and create >$50k yearly in crypto

Staking: aka Proof of Stake

Proof of stake is another consensus mechanism that is much more energy-efficient. Instead of churning through algorithms and electricity, participants move their coins in the currency into a specific wallet and freeze them there to 'stake' them in support of the network. The more coins you stake, the more you earn. This does not require big machines like the Goldshell ASIC pictured above. Ethereum, the #2 cryptocurrency behind Bitcoin, is supposed to be moving to proof of stake sometime in the future. As of today, both Bitcoin and Ethereum use the energy-intense proof of work consensus mechanism.

Crypto Terms and Phrases

gm - "good morning" - Because there's no traditional banking schedule to follow, unlike the stock market, crypto markets trade 24/7. I'm pretty sure crypto people tweeting 'gm' came from them waking up to positive gains made overnight.
wagmi - "we're all gonna make it" - This is another weird, bullish acronym that probably originated on Twitter.
Airdrops - Airdrops are free-ish distributions of new coins/tokens. Generally speaking, you need to be part of the coin's community or fulfill some basic marketing requirements like tweeting about the coin to participate in the Airdrop. Usually, airdrops are to publicize a new coin, but they can also occur for established coins. Hustling to get into an Airdrop will reward you with free coins that could be worth a lot someday.
NFTs - "Non-fungible tokens" - These emerged a year or two ago to establish ownership stakes in digital files or goods.
HODL - This is a mis-spelling of 'hold' and is a rallying cry for cryptocurrency people to hold their coins, awaiting the next big bump in the market.
"not your keys, not your crypto" - Keys in this context are the technical cryptographic hashing function that identifies your crypto funds as yours. This phrase is objectively the 'best' security practice when it comes to cryptocurrencies. Basically, if you are letting third parties like Coinbase hold your crypto, you aren't really in control of it. In practice, however, cyber security at crypto firms is top-notch in response to several hacks early on in the crypto space, like the infamous Mt. Gox exchange disaster in 2014.  
DYOR - "Do your own research" - Crypto is much less regulated than traditional money, so double-check everything. Company names, wallet addresses, who is backing a project, etc.

The Haters

Warren Buffet, Jamie Dimon, and a bunch of other traditional money types love to hate crypto. They call it "Fools gold" and "an index of money laundering." Let's think about their position here for a minute. They have lots of power in the traditional banking system as we know it today -- they don't want cryptocurrencies to displace them. Actions speak louder than words, and institutions like banks have been buying up cryptocurrencies (primarily bitcoin) over the past year or two. Like it or not, it's impossible to ignore now. I think crypto has reached 'critical mass' or 'escape velocity' or whatever term you want to use to say that it will be around forever. El Salvador recently added Bitcoin as an official currency - they won't be the last country to make such a bold move.


  • Bryan sold his shares of Chipotle Mexican Grill for about what he bought them for.
  • Lindsay, Chloe, Antonio, and Garrett are still sitting on the additional $1000 in cash. Please remember to update the google sheet detail tab when you buy/sell something. I look at the revision history each month so I can include your trade in this newsletter. The summary tab is at the bottom of this email as a picture and the live link to it is here.
Current snapshot of Pasta Dollar / Poppy Seeds portfolio google sheets tracking spreadsheet.
Current snapshot of Pasta Dollar / Poppy Seeds portfolio google sheets tracking spreadsheet.
This post originally appeared in our family email newsletter called Poppy Seeds, which evolved into the Pasta Dollar website.