Applying the Power of Compound Interest to Crypto
Albert Einstein once said that he considered compound interest the most powerful force in the universe. This quote has become a universal truth in the finance world. The medium-to-long term upside of compound interest has significant implications for investors. This financial tool is now available to crypto investors, providing them with the ability to earn compound interest in Bitcoin with services like the BlockFi Interest Account. But how does it all work?
How Does Compound Interest Work?
Compound interest is one of the most powerful financial tools for individuals and businesses to ensure long-term financial stability. The key is patience. Generally speaking, products offering compound interest look at returns over one, five, or even 40-year timelines. The longer you save, the more interest you will earn on your initial investment. And the more you add over time, the higher your potential long-term earnings can be.
But how does compound interest work? Say you have the opportunity to deposit 1 BTC on February 28, 2019, earning 6% interest that compounds daily. On April 1, your account balance will grow to 1.005 BTC Over the previous 31 days, you earned 0.005 BTC interest on that deposit.
But where does the compound interest come in? In the first month of your account, interest was being earned on the initial 1 BTC deposit. Now, in the second month, you’ll be earning interest on 1.005 BTC, increasing the amount of interest you will earn going forward. On May 1, your new account balance will be 1.010 BTC, having earned 30 days of interest totaling 0.005 BTC. This process repeats month over month until you decide to withdraw your funds.
At the end of 12 months (assuming a static interest rate and no additional funds were added to the deposit balance), you will have an account balance of 1.062 BTC, having earned 0.062 BTC of interest over that time period. If your initial deposit was 2 BTC, your 12-month balance would be 2.124 BTC. If the first deposit was 5 BTC, then your end-of-year balance would be 5.309 BTC. The power of compound interest increases with the amount you provide into the account over time.
How to Earn Bitcoin or Ether with Compound Interest
For most crypto investors, keeping their digital assets on an exchange or in cold storage is their long-term strategy. But this doesn’t help create more wealth for them beyond the value of their investments increasing. An easy way to earn bitcoin or ether is with the power of compound interest. In the same way it works within the traditional financial world, there are services like the BlockFi Interest Account that offer options for increasing your overall cryptocurrency holdings. The principle is the same but instead of depositing dollars, you deposit Bitcoin or Ether.
For example, using a similar example to the one above, let’s say you deposit 1 Bitcoin on February 28, 2019, earning 6% compound interest a month. On April 1 your new balance 1.005 BTC. And just like that, after 31 days, you earned 0.005 in Bitcoin interest.
At the end of 12 months of storing your 1 Bitcoin, your new balance would be 1.062 Bitcoin. But what if you had originally deposited 5 Bitcoin? Your 12-month balance would be 5.309 BTC. It’s as easy as that for individuals and businesses to passively earn Bitcoin or Ether over time and increase their overall cryptocurrency portfolio.
The impact of compound interest is dictated by the amount you invest in the account. Some people invest a lump sum at the beginning and let it sit until they reach their target earnings. Others will deposit small-to-medium sized amounts over the course of years until a certain amount of time has passed. It all depends on your financial goals and how much you would like to deposit.
Start Earning Interest on Your Cryptocurrency
Whether or not Einstein actually said that compound interest is the eighth wonder of the world doesn’t matter. What matters is that the sentiment is absolutely true and have become a universal truth in the financial world as a result.
The BlockFi Interest Account is a new way to start earning interest on Bitcoin and Ether. Earn interest daily and get paid out at the beginning of every month. If you have any questions about BlockFi Interest Account or crypto-backed loans, feel free to reach out to our team at email@example.com. We love hearing from you.
Originally published at blockfi.com.
How to Hodl Crypto and Earn Compound Interest was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.