Most of the content below has been either directly quoted or slightly modified from “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments”. Quotation marks and citations have been omitted for readability. I highly recommend it to anyone interested in understanding the inner workings of future Bitcoin Lightning Network implementations. Continue reading How Does the Lightning Network Actually Work?

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This week, a friend sent me an article about a new “eco-friendly” proposed Bitcoin competitor, Chia Network. Aside from my confusion on the “Proof of Space and Time” consensus algorithm Chia uses, the gist of the article, and many like it that have arisen recently, is that as Bitcoin’s mining difficulty continues to increase (existing power-consuming mining operations grow and new entrants arrive into the space), Bitcoin may ultimately consume all the world’s energy supply. Continue reading Will Bitcoin Mining Consume All the World’s Energy Supply?

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I wrote the post below a few years ago. Bitcoin still intrigues me and with so many central banks moving to negative interest rates I believe there is a chance that bitcoin’s progress could be boosted significantly as people (savers) move money away from regulated (manipulated) currencies.

Time will tell, but with the cash controls on the horizon as well you can see more and more reasons to try to avoid central bank controlled assets altogether.


There has been a lot of excitement (fear) recently around Mt. Gox, the early leading Japanese bitcoin exchange, and their suspension of withdraws from all accounts on their service. The strange behavior of the company coupled with several unfavorable news stories by Russia (banning) and New York (plans to regulate) caused the price of a bitcoin to fall from $800 to $500 (currently $620) over the last 10 days.

Bitcoin’s volatility scares many people but one of the attributes that I love about the system is its ability to preserve capital by minimizing intermediate transaction fees.

Tonight I attempted to pay an outstanding property tax bill for a property in Jefferson Co, Alabama. Granted, Jefferson County (Birmingham Metro) is not known for its financially savvy government. In fact, until it was surpassed by Detroit ($18B) in October 2013 it was the site of the largest municipal bankruptcy in history ($4B). Impressively enough, they have a payment portal where you can see current charges and make payments on property taxes.

In the end, the transaction totaled just over $2,100 and there were $55 of transaction fees attached. These numbers fall within with traditional 2.9% + 30 cents fee schedule of most major payment processors but I was appalled at the sheer size of the fee so I cancelled the order, wrote them a check, and saved about $54.50 in the process.

The sad truth is that I wish it were a problem isolated within Jefferson County. It’s not. Our current payment infrastructure is too costly and I believe that bitcoin could be a fantastic way to improve a merchant or government’s efficiency and give customers more value for their money.

For instance, a company with a 20% profit margin could (on some very rough math) make themselves 16% more profitable on a $100 sale if they could eliminate just this $3.20 expense. A company with a slim 5% margin could improve results by 64%. Every cent counts and chopping 3% off the gross in a low margin business creates problems quickly.

While bitcoin may not currently ‘preserve value’ due to its volatility, it has tremendous potential to do so with widespread implementation across thriving businesses.

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This passage is dedicated to simply understanding the Operating section of the Statement of Cash Flows (SCF).

Accounting at its core is a rule based science; the rules of which can be memorized. However, memorization is a terrible substitute for comprehension. Real understanding comes from recognizing the logic and context of why a rule exists instead of memorizing how to apply it.

With this in mind, there are few topics that cannot be condensed to a simple rational statement that informs the user of the rule and the logic behind why it exists.

“If you can’t explain it simply, you don’t understand it well enough.” – Albert Einstein

Accounting ‘rules’ are logical simplifications of how transactions or items should be presented to users of financial statements. The trick is to understand what should be presented and why.

Why Does the SCF Exist?

Most businesses operate under ‘accrual’ basis (as opposed to ‘cash’ basis) accounting.

One large difference between accrual and cash accounting is the existence of the ‘matching principle’ in the former. Under the matching principle, expenses are recorded when incurred, regardless of when payment is made for the associated product or service. In practice, this means that expenses are incurred when its partner revenue is recognized or when the associated service is consumed.

By utilizing the matching principle, accrual accounting financial statement users are able to make decisions using revenue and expense data that ‘match’ one another with regard to their associated costs of production.

The problem is that accrual based income statements, in isolation, do not inform the user of actual changes in a company’s cash position for a period.

This is why the SCF exists: to show the user how and why a company’s cash balances changed from the previous reporting period.

Let’s take it from the top…no, really!

At the top of any statement of cash flows (prepared under the indirect method) will be the company’s net income for the measurement period. This is where the Operating section begins.

Add Back Non-Cash Expenses

Depreciation (or Amortization)

Depreciation is the classic ‘non-cash’ expense. It is also a great example of the matching principle in action. Each capitalized asset slowly loses value and utility over time through wear-and-tear and obsolescence. Thus, depreciation was invented to allow companies to recognize this loss of value or expense as it occurs throughout the life of certain assets.

Ex: Imagine NewCo sold no shoes for the period, nor collected any money from customers. There is absolutely no ‘business’ going on within the company. Now assume NewCo owns one asset, a large mechanical press used to form shoe molds. This asset was capitalized several years ago and yearly depreciation is $100.

NewCo’s net income is ($100) however NewCo’s CFFO is $0 because yearly depreciation expense is added back to net income as a non-cash expense.

Subtract Net Increase in Working Capital

In the context of the SCF, we are primarily concerned with changes in net working capital – the period over period change in net working capital – as opposed to the net working capital figure itself.

The increase in net working capital will be subtracted from net income because a business that has increased/grown its net working capital has done so directly or indirectly by using cash.

Current Assets

The most common current assets relevant to CFFO are accounts receivable (AR), inventory, and prepaid expenses. As with depreciation, it’s easier to understand why the increases (decreases) in current assets are subtracted (added) from (to) the cash balance if we look at some simple examples.

Ex: NewCo again has no operations for the period. But, last period it had an AR balance of $70 and this period has a balance of $0. NewCo has collected money from a customer for a sale that was made and recognized in an earlier period. Here, it is pretty easy to see that this decrease in a current asset account should be added to CFFO because NewCo now has more cash than before.

Ex: Now suppose NewCo’s AR balance increased from $0 to $70 in this period. Here, NewCo did make a sale during the period which accounts for the increase in AR but the Company has actually financed this sale for their customer and collected $0. Because there was no cash collected, the net income of $70 must be reduced by $70 to show CFFO of $0.

Current Liabilities

The most common current liabilities relevant to CFFO are accounts payable (AP) and accrued expenses.

For current liabilities, the same logic as assets applies but to be sure you have the correct sign, think like Charlie Munger and “invert, always invert.” For example, if accrued expenses increased this period (from $0 to $20), your net expenses to be paid grew because you did not pay something. This is neither inherently good nor bad but it is a fact that your cash on-hand increased by $20 because you did not pay these expenses. Thus, your CFFO from the change in accrued expenses is +$20.

After sorting through each working capital item, you will reach a number for the net increase (decrease) in working capital. This value will be subtracted from net income and non-cash expenses to reach the CFFO.


Greater understanding of the operating section of the SCF can lead to better organizational and strategic management.

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