Effective Interest Rate: (Daily)
Initial Investment: $1000
Interest Rate: 10%
Interest Earned: $1420.65
New Balance: $1710.33
Cash Withdrawals: $710.34
Compounding Interest - Investment Analysis
|Day||Date||Earnings||Reinvest||Principal/Cashout||Total Principal||Total Cash|
In the beginning, the only way to earn value from cryptocurrency was to purchase coins, and then they went up in price. Crypto was a volatile world, and it was so far separated from the traditional banking system that many doubted it would last. The rise of stablecoins with their lower volatility risk has opened the door to many conventional financial instruments. One of them is the ability to earn interest on your deposits. Let’s explore what you can expect to earn from interest on your crypto deposits.
Appeal of Interest-Bearing Crypto Accounts
The general appeal of this lower-risk approach to investing in crypto is encouraging many less risk-tolerant investors to leap into the world of De-Fi. This model has a few differences from traditional banking. The idea of earning interest from a deposit is not new, but investors are usually used to barely beating inflation if they can do so at all.
The crypto institution makes its profit using arbitrage, just like the traditional banking system. It lends crypto and charges a higher interest than it pays out to its interest-bearing accounts. As a result, the primary asset typically loses value over time, but with crypto, you can experience gains in the value of the asset in addition to the interest. Also, you can earn other incentives that make this a more attractive option.
How Much Can You Earn?
In theory, compounding interest works in a similar way to the traditional banking system. However, how much you earn is not as simple. For instance, some companies will allow you to receive your earnings in the form of a COMP token. Companies, such as Compound, reward customers with tokens that carry special privileges, such as governance rights and voting rights. This is similar to preferred stock and can be actively traded on the market or sold for cash.
Crypto Compound Interest Calculator
The incentives and perks add value to the interest that goes beyond the compound interest earnings. Just like traditional banks, they offer incentives like no minimum balance requirements and much more attractive interest rates than banks currently offer. So, in principle, compounding in cryptocurrency works the same way as in the traditional banking system, but it also works like a stock portfolio. Let’s see how this works.
This daily compound interest calculator lets you calculate how much you will earn on your investment for a fixed number of days. For example, let’s say the annual interest rate was 5% for Bitcoin, 4.5% for Ethereum, and 9.3% for Stablecoin. Then, we can divide those by 365 for the daily interest rate, or 0.0137% for Bitcoin, 0.0123% for Ethereum, and 0.0255% for Stablecoin.
Let’s say you invest $10,000 in Bitcoin, $10,000 in Ethereum, and $10,000 in Stablecoin. When you plug these numbers into the calculator, in one year (365 days) with a 50% reinvestment rate, you will end up with:
That is $30,955 total at this time next year, assuming a reinvestment rate of 50%. Of course, this also assumes that the interest compounds daily. Also, if weekends are not included, 365 days of compounding will take longer than a calendar year. The calculator will show the date your investment period ends. You will need to read the terms to understand the policies of your crypto institution.
Now you see the power of compounding. Let’s say you want to make the same investments, and you only plan to reinvest 10%. Here is how it breaks down after 365 days.
That is a total of $30,190. As you can see, reinvesting pays off big time when it comes to compound interest.
Now, crypto offers many of the same instruments and ways to grow your wealth as traditional banks. One thing that is different from standard interest-bearing accounts is that you can use portfolio diversification to manage risk versus yield. In addition, you are not limited to one currency, the U.S. dollar. You can expect to earn a different interest rate from Ethereum, Bitcoin, and every type of coin you own. Interest-bearing accounts are a tool that every crypto investor needs to check out to grow their wealth.
The takeaway from all this is that if you are thinking about finding an account where you can earn interest on your investment, you need to shop around and compare rates first. The advertised rate might sound high, especially when compared to current savings rates at traditional banks, but you need to look at how often the compounding takes place, and you need to understand the power of reinvesting. This is an opportunity that can be lucrative, but you must do your due diligence and understand what they are offering first.