Cryptocurrency and Compounding Interest | Bitbuy.ca

How To Leverage the 8th Wonder of the World ‘Compounding Interest’ To Become Wealthy

Let’s be honest: The interest you receive on your savings account is pitiful.

At most, you might receive 0.2 percent on your deposits in a high-interest savings account. But, when rampant price inflation is taken into account, the real interest rate is negative.

In other words, your hard-earned dollars and cents are being eroded by inflation, which is at its highest level in decades and is driven by soaring food, energy, and shelter costs.

That said, you can take solace in the fact that at least the interest is better than nothing at all.

This brings us to a term that many people may have heard during Economics 101 in high school: Compound interest.

But what is it, and how do you earn compound interest anyway?

Compound interest is essentially the interest you earn on interest. Depositors put money into the bank for long-term financial endeavours, and they start earning a little bit at a time every month.

Put simply, in addition to earning $20 on the principal $1000 deposit, you also earned 40 cents on the $20 you received. It might not seem like much right now, but making interest all adds up over time, especially when interest rates start rising and inflation (hopefully) eases.

Indeed, this is a fundamental feature of traditional finance. But, of course, you might be wondering what this has to do with a crypto asset you might be holding right now.

Well, you may not be aware of this, but you can generate interest from your crypto holdings. The latest innovations have enabled modern-day investors to add another layer to their wealth management objectives.

Let’s explore some more!

How Does Compounding Interest Apply to Cryptocurrency?

Is it even possible for crypto investors to garner interest in a decentralized finance industry?

Yes.

Years ago, this would have been an impossible pursuit. However, in recent years, the cryptocurrency ecosystem has evolved. Crypto is in a constant state of innovation and has allowed cryptocurrency savings accounts to come to fruition.

With Wall Street embracing crypto investing and Main Street bringing crypto holdings into the regulatory fold, the world has moved forward and essentially legitimized the industry.

Does this mean you can let the cryptocurrency compound interest begin?

In a word, yes.

Generally, there are two methods to engage in this popular trading strategy.

The First is Staking and Reinvesting.

In the digital currency community, traders will use rewards for staking tokens and reinvest them into staking. This tactic leads to an increased number of staked coins and future rewards, resulting in compound interest in cryptocurrencies, whether it is interest on Bitcoin assets or interest from GrimaceCoin.

Here is an example of how it would work:

  1. You stake 100 Teddy Bear coins.
  2. You earn one percent interest in the first period, equal to one coin.
  3. You add it to the initial staked amount for a total of 101 tokens.
  4. When the second period arrives, you earn two percent interest on this sum. This raises your balance to 103 tokens.
  5. You choose to reinvest.
  6. By the time the third period starts, the interest rises to three percent, and you earn three more tokens, bringing your total sum to 106 tokens.

Of course, it all depends on the interest rate offered by the cryptocurrency. Still, the idea is the same, regardless of the rate provided to crypto investors in this current market landscape.

The Second is a BlockFi Interest Account or BIA.

The BIA is a cryptocurrency compound interest savings account. It functions like a traditional savings account: You earn compound interest savings with interest added to your principal balance.

Here is what you can expect, according to The Financial Post:

  • 5 percent annual percentage yield on Bitcoin deposits up to .1 Bitcoin.
  • 5 percent annual percentage yield on Ethereum deposits up to 1.5 Eth.
  • 75 percent annual percentage yield on Litecoin deposits up to 20 Litecoin.
  • 8 percent annual percentage yield on Gemini deposits up to 40k GUSD.
  • 8 percent annual percentage yield on USD Coin deposits up to 40k USDC.

It should be noted that USDC and GDU are stablecoins and pegged to the U.S. dollar.

Essentially, this type of account proffers you the best of both worlds: the zero-risk nature of savings accounts and the exciting world of cryptocurrency and decentralized finance.

You need to create an account and deposit money with fiat currency and a chequing account.

That’s it.

But this is not the only advancement in BlockFi. The next stage is crypto-backed loans that rely on crypto holdings as collateral.

Borrowers can receive loans worth up to 50 percent of the value of their holdings at a rate of 4.5 percent.

And, to show how crypto is embracing credit, no-fee credit cards are being released. They function by allowing you to garner 3.5 percent in Bitcoin for each dollar you spend for the first three months. This percentage comes down by a minuscule amount every year.

Many popular crypto websites are hopping on the bandwagon, extending their clients as high as 14.5 percent interest on stablecoins, be it Tether or DAI.

What’s Next?

You might have read about families in North America and Europe who had fully adopted the cryptocurrency lifestyle. This involves earning an income and paying for goods and services entirely in crypto. Is this far-fetched? Not with how ubiquitous it has become.

Crypto has become so prevalent that more countries are installing or considering making Bitcoin legal tender, similar to how certain jurisdictions have made gold and silver legal.

No longer do investors need to endure the severe market volatility typically associated with crypto. Instead, they can take advantage of the technology behind these protocols and digital assets and the deflationary component of these virtual tokens through chequing and savings accounts and compound-related trading endeavours. Admittedly, it can be challenging to become accustomed to, but gradually incorporating Bitcoin, Ethereum, and the broader crypto industry into your personal finances can lead to better wealth management.

Got Bitcoin? Better yet, got cryptocurrency compound interest?

Sources

The Financial Post

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