The cryptocurrency market and the related field of decentralized finance, or “de-fi,” may seem like the realm of science fiction to some. But given how the two have been evolving, there’s more common ground between crypto, de-fi, and traditional finance than one may expect.
One point of convergence lies in investment strategy, as crypto traders and advocates of a decentralized future have something to learn from those who invest in more conventional assets. This is especially true on the issue of pooling compound interest, which is now emerging as a viable strategy for some cryptocurrencies.
What exactly is compound interest, how does it differ from simple interest, and how can it work in the context of today’s crypto coins—for example, with Monero (XMR) tokens kept in a Monero wallet? Here’s a briefer on everything you need to know if you want to explore this investment strategy for your own crypto assets:
Simple Interest vs. Compound Interest: A Briefer on How They Work
First, to understand how compound interest works, let’s review its definition alongside that of simple interest.
Simple interest is always based on the principal amount that’s being invested. The final amount with interest can easily be determined using the formula A = P x R x T, in which A stands for the final value plus interest, P stands for principal, R stands for the rate of the interest, and T stands for the time period. By that logic, if you were to collect a simple interest of 5 percent on 1,000 crypto coins over a period of three years, then you would end up with a final amount of 1,150 coins.
Conversely, compound interest involves receiving interest on the principal amount, adding that collected interest back to the principal, and then letting more interest accrue over that increased amount. The formula for determining compound interest is a little more complicated than the formula for getting simple interest; for compound interest, the equation is A = P x (1 + R)T. Thus, if you had 1000 crypto coins with a 5 percent annual compound over a period of three years, you’d be left with the final amount of 1,157.63 coins. The difference becomes even more significant as you keep compounding the interest and as you continue to let the final amount accrue.
How Will Compound Interest Apply to Cryptocurrency?
For investors who deal with conventional assets like fixed deposit investments, the idea of accruing compound interest is nothing new. However, now that the field of cryptocurrency investment has burgeoned in recent years, the same strategy is now being applied by crypto traders. This is especially true for those who are active proponents of de-fi.
De-fi advocates seek alternatives to the controls that banks and other traditional financial institutions have on current forms of currency. One form of investment activity that’s become popular with de-fi traders is staking cryptocurrency or using crypto coins in crypto wallets as collateral for transactions in a proof-of-stake or PoS blockchain system. If certain consensus mechanisms are adjudged to have been met by the blockchain technology. The traders who’ve staked their coins on those transactions can earn rewards like compound interest on their crypto investments.
Like in the example detailed above, crypto traders who stake more interest and let the principal amount accrue continually can gain significant rewards from their platform. If both the crypto market and the de-fi community continue to grow, this investment strategy will eventually become more mainstream, too.
Points to Ponder on Your Future Cryptocurrency Investments
If you’re new to crypto, the investment strategy that you’re probably most familiar with involves buying coins and selling them when it’s profitable for you to do so. You may not have thought about a strategy that involves holding onto your coins for a long time and accruing interest in them.
But crypto technologies and platforms are constantly evolving, and some cryptocurrency investment and management platforms offer options for helping you earn compound interest on your assets. You may want to explore these options if you get serious about crypto or if you’re willing to pool accrued interest on your tokens. It’s also a worthwhile investment to make if you think there’s long-term potential in your crypto assets.
Whichever investment strategy you choose for your crypto coins, and whether you see crypto as a medium-term asset or a long-term asset, just remember to invest what you’re capable of. Never invest large amounts if you can’t afford to lose them, and don’t cave into any pressure to change up your crypto trading strategy just because everyone else is doing so. Continue to learn about developments in the field of cryptocurrency, and using that knowledge, choose an investment strategy that reflects your financial interests. That is the surest way to add value to your crypto trading experience and get the rewards that you truly aspire for.
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FAQs
Compounding crypto is a long-term investment strategy that involves reinvesting profits into the same asset to increase returns over time. It is similar to compound interest in traditional finance, where the interest earned on an investment is reinvested to generate more interest.
What are the advantages of compound interest? ›
Compound interest causes your wealth to grow faster. It makes a sum of money grow at a faster rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding period. This means that you don't have to put away as much money to reach your goals!
How does Compound work? ›
Lenders deposit or lock their crypto into Compound to earn money at a dynamic annual interest rate. Each particular token is stored in a liquidity pool of the same token using Compound's sophisticated smart contracts. Lenders receive the Compound interest in the same token that they deposit in the pool.
What is the power of compound interest? ›
Compound interest is when the interest you earn on a balance in a savings or investing account is reinvested, earning you more interest. As a wise man once said, “Money makes money. And the money that money makes, makes money.” Compound interest accelerates the growth of your savings and investments over time.
How does compound interest work on investments? ›
When you invest, your account earns compound interest. This means, not only will you earn money on the principal amount in your account, but you will also earn interest on the accrued interest you've already earned.
Does crypto Compound daily? ›
You will start earning compounding interest after a minimum of 24 hours of your transfer. The interest is paid out daily and is automatically added to your Savings Wallet.
What is compound interest in simple words? ›
Compound interest is interest calculated on both the initial principal and all of the previously accumulated interest. Generating "interest on interest" is known as the power of compound interest. Interest can be compounded on a variety of frequencies, such as daily, monthly, quarterly, or annually.
What is compound interest with an example? ›
For example, if our money is invested at r % compounded annually then it takes 72/r years for our money to get doubled. This calculation is also useful for calculating the inflated value of our money, i.e. it gives in how many years the value of our asset gets halved if it gets depreciated annually.
What are the pros and cons of compound interest? ›
Certain investments, like savings accounts, certificates of deposit and reinvested dividend stocks, utilize the benefits of compounding interest. This interest calculation benefits you in the opposite way of simple interest; it is great for investments, but horrible when it comes to loans.
How to earn compound crypto? ›
You automatically accumulate COMP by depositing to Compound. Once you have earned over 0.001 COMP, it will be distributed to your wallet the next time you make a deposit or withdrawal with Compound.
You can simply follow the 8-4-3 rule of compounding to grow your money. Let's understand it with an example. For instance, if you invest a lump sum of Rs 21,250 every month in an instrument that earns 12% interest per annum and is compounded yearly, you will get your first Rs 33.37 lakh in eight years.
Is compound crypto a good investment? ›
Over the last 30 days, Compound had 13/30 (43%) green days. According to our historical data, it is currently profitable to invest in Compound. The price of Compound increased by 59.15% in the last 1 year, while the coin's 3-year performance is -92.52%.
Why should you pay yourself first? ›
By the time monthly bills and everyday expenses are paid for, it can be hard to find extra money for savings. That's where the “pay yourself first” method comes in handy. This budgeting strategy encourages setting aside money for things like retirement, savings and debt before paying for other variable expenses.
What is the secret of compound interest? ›
“Compound interest works by earning interest on the interest already earned,” said Khwan Hathai, CFP, CFT, founder of Epiphany Financial Therapy. This leads to exponential growth, she said, meaning that even small initial investments can grow significantly over time, making it a powerful tool for wealth accumulation.
How much do I need to retire? ›
A common rule is to budget for at least 70% of your pre-retirement income during retirement. This assumes some of your expenses will disappear in retirement and 70% will be enough to cover essentials. Remember, that's a general guideline, and your needs may vary.
How to make money with Compound crypto? ›
Put simply, Compound allows users to deposit cryptocurrency into lending pools for access by borrowers. Lenders then earn interest on the assets they deposit. Once a deposit is made, Compound awards a new cryptocurrency called a cToken (which represents the deposit) to the lender.
Can I earn interest on my cryptocurrency? ›
Put simply, investing in crypto is no longer just about price appreciation. Instead, investors can now earn interest on their idle crypto tokens across various methods. This includes savings accounts, staking, and yield farming.
How do you make money off crypto interest? ›
How to Earn Interest on Crypto
- #1. Crypto Staking. The best way for Crypto investors to earn interest on crypto is via staking. ...
- #2. Lending. ...
- #3. Yield Farming. ...
- #4. Crypto Savings Accounts. ...
- #5. Crypto CDs. ...
- #6. Crypto-Backed Loans. ...
- #7. Crypto Dividends. ...
- #8. Crypto Referral Programs.
Lending and staking crypto may offer greater returns than stocks or savings accounts. This interest can compound over time and provide passive income for crypto investors. Still, crypto investing also comes with unique risks that might make it unappealing to the typical income investor. Secure.
