Today there are many services that allow you to earn money through compound interest.
There are many financial products, but if we concentrate on cryptocurrency, the services we have to use this method are few.
Compound interest is a financial method, which yields the accumulation of capital through interest.
In the cryptocurrency industry, this tool is used in cryptocurrencies that use token staking, but we will see this later.
Let’s go with order and see how it works and how we can use it in our favor.
What is compound interest
Legend has it that in AD 600, an Indian emperor could not amuse himself, so he issued a ban where anyone who entertained him, the emperor gave anything as a reward.
Then a citizen appeared who carried with him a square table with small carved statuettes.
This was the chessboard and the citizen made the king play until he had so much fun that he said: “you have made me so happy that you can choose what you want.”
Then the citizen said to him: “I would like to receive a grain of rice for the first square of the chessboard, two for the second square for the third, and so on …”
The emperor, astonished by the request, immediately ordered the treasurer to satisfy the citizen’s requests.
It took a week to calculate all the rice grains needed for the request, which amounted to:
9.223.372.036.854.780.000 grains of rice.
A grain of rice that doubled for every box on the board that had 64 of them.
In the end the emperor could not please the citizen because he did not have this amount.
This example follows exactly the compounded interest, increasing the initial capital by reinvesting the interests.
In fact, Accumulation of Interests is defined, precisely because the interests themselves contribute to the increase.
Obviously this is a very long-term technique because in a short time the effects would not be seen.
How compound interest works
Let’s take a trivial example, suppose you have $ 100 to invest, and suppose you invest them in a fund with a 5% annual return.
Let’s suppose then that the interests we are going to earn do not take them and leave them there.
Making some calculations, we see how capital has increased over the years.
In fact, looking at the table above, capital has almost tripled in the last 20 years starting in 2019, with only interest generating almost 60% of the value.
These are data that will then have to be added to any taxes and inflation, but this is more or less the growth.
It is practically very important to make the capital grow with interest, because there would be an extra return.
Instead it becomes interesting if we use this concept in cryptocurrencies.
We would have 3 important points to consider:
- A deflationary currency;
- A constant growth of the token value;
- Lower taxation and maintenance cost compared to a share or fund.
Considering these aspects we are going to recalculate the example of the first using Bitcoin as an investment.
Suppose we have $ 100 in BTC, and suppose we have them in a company that offers us 8% per year.
Suppose then that the price is firm on $ 9,000 and we see this chart.
We would have earned the same values, however, the interesting thing is that we would have gained Bitcoins unlike before which were Dollars.
The important thing is that if we consider the increase in value of the BTC, then the gains would have been much more.
Now let’s say the btc goes up $ 500 a year starting from $ 9000 and we always assume 5% annual interest.
Let’s do some calculations and get this table out.
As we can see, not only are the performances much higher than before, but we would have gained about 6 times more than example 1.
This obviously depends on the price, considering that the btc is appreciated over the years, and assuming at least $ 500 in value of increase per year, the total value will be very important.
In this calculation I used 5% as an example, but there is a company called Blockfi, which gives its customers 6.6% per year, which is not bad.
The use of compound interest in cryptocurrencies
As I said before, in the previous examples, using this system in the cryptocurrency world is very important and profitable.
In fact, financial mathematics showed us that using this formula brings us many benefits.
In the cryptocurrency sector, there are two tools we can use to take advantage of this system:
- the system of relying on third parties who offer these services;
- Use token staking.
Companies like Blockfi or exchange as a binance that use these services to generate interests.
For example, Blockfi offers 8% per year just holding the Bitcoin, Ethereum and Gemini USD cryptocurrencies on its zero-managed account (details here).
Which is very simple because you don’t have to do anything at all, the same thing about the binance that the Lending service offers.
Instead there are some cryptocurrencies, which use the consensus algorithm Dpos or Pos which are for example Tron, Eos, etc.
These projects give the opportunity to generate profits per day or week, staking tokens.
With this system you would be earning a daily number, plus if you go to freeze the tokens you earn you will add up and generate additional profits.
This system is practically the same as before only using cryptocurrencies.
The only problem that could arise is the failure of the project itself and all the tokens will be lost.
Investing in well-established projects is very important, it’s worth your money.
There is a service called Staking Rewards, reachable here, where you can see all the projects that offer staking.
Using the instrument of compound interest is very important, because it allows us to generate a further profit that is constant over time.
To date this instrument is little used because it requires a long time interval unlike speculative products.
The same Warent Buffet said:
“My wealth derives from a combination of factors: living in America, possessing some lucky genes and exploiting compound interest.”
So do not take advantage of this tool and be unconscious.
This does not mean that I encourage you to do it, but I encourage you to do two calculations and research to show you that it works.
That’s why I’m waiting for you at the next article.
In this article I used reference links, which bring benefits to me so I can continue to maintain the site and you who use them.