Here’s how to apply the power of compound interest to cryptocurrencies

What is compound interest or compound interest?

There are basically two options for calculating interest: simple interest and the compound interest. Simple interest refers to an annual percentage of the principal or amount invested.

As a child, I learned at school that these mathematical notions “managed” the World: • Golden ratio • Avogadro’s constant • Fibonacci sequence With a little more hindsight I realized that it was above all necessary to add : • Compound interest • Pareto’s law

For example, if you invest €1,000 at a simple interest rate of 5% for ten years, you will receive €50 in interest each year. Bonds are an example of a type of investment that pays simple interest.

In contrast, compound interest takes into account the reinvestment of capital gains, which in turn generate interest. Compound interest is actually “interest on interest”.

Comparison between simple and compound interest in numbers

Consider an investment of €1,000 at an interest rate of 5%. An interest payment of €50 is sent to you after the first year. However, you decide to reinvest it at the same rate of 5% rather than spending it. Your interest is calculated on an investment of €1,050 for the second year, or €52.50. Interest for the third year will be calculated on a balance of €1,102.50 if you decide to reinvest it. And so on…

Your capital and the income it generates grow over time with compound interest.

Simple interest and compound interest can vary significantly from each other over the years. Watch how the gap widens over time with a €10,000 portfolio earning 5% interest

Source: economy-pedia.com.

How to take advantage of compound interest with your cryptocurrencies?

Thanks to yield farming to staking and to crypto savings, it is easy for crypto investors to apply compound interest theory.

A platform like Binance offers many products that allow you to earn passive income and reinvest your earnings automatically.

The automatic subscription function of Binance Savings (Binance Savings)

Binance transfers your interest to your Spot Wallet daily if you have subscribed to the platform’s flexible crypto savings product. Although you can reinvest manually, the function of automatic subscription allows you to automate the process. Earned tokens are transferred from your Spot wallet to your savings wallet daily.

Compound interest in trading?

The principle of compound interest also applies to trading. Simply reinvest your earnings by buying new tokens or strengthening your positions on the cryptos you already own.

That’s what all successful investors and hedge funds do, use their capital gains to buy new assets.

However, since the return depends on market fluctuations the results are not at all predictable. The concept of compound interest works best with fixed-return DeFi investment products.