What is Compound Interest and Why It Matters – Crypto Edition

July 12, 2021

What is Compound Interest?

Unlike simple interest, compound interest takes into account a larger sum of money that includes the initial deposit, as well as the additional interest earned annually. This simply means that the amount of interest earned is constantly reinvested, allowing individuals to earn more interest. 

Confused? Here’s a quick example.

Say Bob has $100 in an investment account that earns 10% annual interest. In the first year, he would earn $10 in interest, giving him a new balance of $110. In the second year, he would earn 10% on $110. This larger balance includes both the amount deposited, as well as the additional 10% interest from the initial year. Bob will now have a new balance of $121 by the end of the second year. As the years go on, he will receive the interest that would be compounded annually, allowing him to accelerate the growth of his investment assets overtime. 

Why Does it Matter?

Compound interest plays an integral role in investing by allowing individuals to earn more on their initial investment deposit without having to actively manage it. This amplifies the value of their portfolio and over a period of time, the amount held in an interest account will rise steadily. The longer an individual saves in an account, the more interest he will earn on his initial investment, and the higher his potential long term earnings can be.

While compound interest may be common with regards to savings and fixed deposit accounts in banks, it is also possible to earn compound interest on cryptocurrency. 

Why You should Consider Depositing Your Crypto into Interest Accounts

Despite its volatile nature, cryptocurrencies have piqued the interest of many investors. According to Facts and Factors, the global cryptocurrency market is expected to be worth more than $5,190.62 million by 2026, further cementing the rise in popularity of digital currencies. 

Additionally, CNBC recently reported on the growing trend of the adoption of cryptocurrencies amongst millennials, and how this group of individuals have taken interest in investing in Bitcoin. And if that’s not impressive enough, companies such as JP Morgan have recently created digital coins designed to make instant payments using blockchain technology.

With such reports and findings, it’s clear that cryptocurrency is continuing its upward trend in popularity although market volatility remains high. With more individuals open to parking a portion of their portfolio in such digital currency assets, it may be a smart move to deposit them into interest-earning accounts that allows users to earn interest on deposited cryptocurrencies. Moreover, this serves as a great investment strategy to cushion the impacts of market volatility as evidenced by Bitcoin’s 30% plunge to a near $30,000 in May 2021. 

How can You Earn Compound Interest on Your Crypto?

One of the best – most passive – ways to earn more Bitcoin, Ethereum or any other cryptocurrency is through compound interest. All you have to do is deposit your cryptocurrency in any interest account and lending platform available. At present, there are numerous platforms that help you earn more with your crypto. 

Similar to traditional finance, these platforms offer options for users to increase their overall cryptocurrency holdings by diversifying their portfolios through interests earned on a number of cryptocurrencies. Users would then be able to earn interest at a compounded rate based on the amount deposited without having to actively manage their accounts. One such platform is Hodlnaut that allows you to earn up to 10.5% APY on your crypto assets. This way individual investors can earn passive income based on compound interest with their crypto assets. 

In Conclusion

Compound interest is one way to help individuals earn more on their crypto investments, and has become a critical pillar to consider when growing any financial asset. The key to compound interest is patience. With time, the interest compounded over a few years can aid in the growth of any crypto investment.