Understanding Compounding - So what is Compounding?

avatar
(Edited)

Understanding Compounding

Snipe Understanding Compounding - What is.PNG

So What is Compounding

Compounding is the ability to earn interest on interest. Basically it is reinvesting earnings so that they produce additional interest.

Simple Interest

First you need to understand simple interest before you can start to understand compound interest.

Simple interest is your principal investment amount multiplied by the interest rate.
Example: You invest $100 worth of tokens for three years at 12% per year
Year 1 - $100 @ 12% = $12 You receive $12 and put it in a crypto wallet.
Year 2 - $100 @ 12% = $12 You receive $12 and put it in a crypto wallet.
Year 3 - $100 @ 12% = $12 You receive $12 and put it in a crypto wallet.

At the end three years you have $100 worth of tokens invested and $36 in a crypto wallet. Since you never reinvested the amount you received, it never earned interest.

Compound Interest

Compound interest is your principal investment amount multiplied by the interest rate and then any interest received is reinvested to earn additional interest.
Example: You invest $100 worth of tokens for three years at 12% per year
Year 1 - $100 @ 12% = $12 You receive $12 and add it to the original principal so that it earns interest.
Year 2 - $112 ($100 principal plus $12 year 1 interest) @ 12% = $13.44
Year 3 - $125.44 ($112 year 2 investment plus $13.44 year 2 interest) @ 12% = $15.05

Simple vs Compound

You were able to earn a total of $36 worth of tokens from simple interest as compared to $40.49 when you reinvested your earnings and compounded your earnings.

Staking your tokens

Staking your tokens provides you the opportunity to compound your earnings. If you do not power up or stake your tokens, you are earning simple interest. It will always stay the same and you will get the same amount over and over. This is because your voting power will always remain the same and not grow.

By staking your tokens, you are increasing your voting power thus earning a greater amount from curation. In other words - compounding your return. If you have liquid tokens, stake them unless you already have a plan to use them in a different manner.

You will grow your account faster if you stake your various tokens.

Posted Using LeoFinance Beta



0
0
0.000
3 comments
avatar

Congratulations @darmst5339! You have completed the following achievement on the Hive blockchain and have been rewarded with new badge(s) :

You made more than 600 comments.
Your next target is to reach 700 comments.

You can view your badges on your board and compare yourself to others in the Ranking
If you no longer want to receive notifications, reply to this comment with the word STOP

Check out the last post from @hivebuzz:

Feedback from the July 1st Hive Power Up Day - ATH Volume record!
0
0
0.000
avatar

Compound interest is the way to generating actual wealth. If you don't have money, use time.

Posted Using LeoFinance Beta

0
0
0.000
avatar

See how he takes me through memory lane to my high school mathematics

And then applied the experience with Hive.... Amazing

It's true that if we do not stake our tokens, we are barely earning simple interest and it's not compounding until we stake the interest earned

For higher APY and growth, we need to keep stacking and stacking


Posted via proofofbrain.io

0
0
0.000