“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” -Albert Einstein
We’ve all heard about compound interest and how it can be used to grow your wealth exponentially – especially in the emerging world of cryptocurrency and Decentralized Finance (DeFi) – but most people don’t truly comprehend how powerful it actually is. The most famous story that illustrates just how quickly assets can grow is the one in which a king in India, who was a big chess enthusiast, challenged a sage to a game offering any prize the sage wanted if he could defeat the king. The sage asked for what seemed like a modest reward: one grain of rice on the first square, doubling to two on the second square, doubling again to four on the third square, and so on. By the time we get to the 64th square, there are 263 or 9,223,372,036,854,775,808 grains of rice – a heap of rice that would be larger than Mount Everest!
So how can we make this work for our finances? There are two main factors that contribute to how successful compound interest can be for your investment: The interest rate and the amount of time you leave the investment compounding. The reason compound interest works so effectively is because every time your investment earns a return, the next payment includes all previous returns. This is easier to understand with a simple example, which will also illustrate how much more you earn in the later years compared to early on. In our example, we will use an investment of $10,000 at an annual return of 10% over the course of 25 years.
After the first year, your investment earned $1,000 and is now worth $11,000.
After the second year, interest is calculated on the new $11,000 amount, so this year you would make $1,100 for a new total of $12,100.
Skip ahead to the 10th year and your investment generated $2,357.94 that year and is now worth $25,937.42.
Now let’s skip ahead to the 25th year. Your initial investment of $10,000 earned $9,849.73 in one year and your now worth a total of $108,347.06. In one year, you just made almost as much as your initial investment!
BUT THIS IS CRYPTO AND WE DON’T HAVE TO WAIT 25 YEARS!
We’ve been conditioned by traditional financial institutions to think that returns of 3-5% annually are a great investment. As many of us have recently seen, this barely keeps pace with inflation. In fact, if we kept the example above but used only a 3% return, even after 50 years we would only be getting $1,276.87 annually.
This is why the masses are flocking to cryptocurrency and DeFi. Harnessing the power of DeFi, investors are able to regularly receive annual percentage yields upwards of 50% using investment vehicles such as PegHub autovaults, which compound investors’ returns automatically every two hours. PegHub allows users to farm top cryptos such as Bitcoin (BTC), Binance Coin (BNB), Cardano (ADA), Cosmos (ATOM), Polkadot (DOT), and more. The exciting part about farming cryptos is that not only do you benefit from high annual yields, but if you believe in the future of crypto and that the prices will continue to rise as they have since its inception, you’re increasing your investment in two ways: more tokens, and each token’s value is worth more.
Let’s look at an example of farming Bitcoin in a PegHub autovault for 5 years. For our example we will invest just one Bitcoin, assume 50% APY and an initial Bitcoin price of $20,000.
After one year, our 1 Bitcoin will earn 0.5 additional Bitcoins and our investment now totals 1.5 Bitcoins.
For year 2, we now get returns on the entire 1.5 Bitcoins earning an additional 0.75 this year.
Finally, by year 5 we will earn 2.53 Bitcoin that year and our total investment has now grown to 7.59 Bitcoins!
Assuming Bitcoin remained at $20,000 the entire 5 years, if we look at the dollar value of our example investment, we would have increased from $20,000 to $151,800. However, let’s say that the price of Bitcoin hits $100,000 at the end of these 5 years (which most analysts are predicting to happen even sooner). In that case, not only did we 7.59 x our amount of Bitcoin, but the value of Bitcoin also increased by 5 times. Our $20,000 initial investment would now be worth $759,000, thanks to the power of compound interest and the incredible opportunities afforded by DeFi and cryptocurrencies.
This is the future of investing and it’s why banks, traditional financial institutions, and certain governments keep spreading FUD (Fear, Uncertainty and Doubt) in the media. They don’t want the average person to be successful. But crypto is just getting started and it’s here to stay!
Check out our PegHub autovaults today and start harnessing the power of compound interest to grow your favourite cryptocurrency!