Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings (interest or capital gains) from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period.
A more detailed explanation with examples below:
How Compounding Works
To illustrate how compounding works, lets say €100.000 is held in an account that pays 5% interest annually. After the first year or compounding, the total amount in the account has risen to $105.000, an additional $5000 in interest being added to the €100.000 principal. The entire amount is then re-invested, so in second year, the account realizes 5% growth on both the original principal and the €5000 of first-year interest, resulting in a second-year gain of €5250 and a balance of €110.250 (an additional €250 compared to the gains of the year before). After 10 years, assuming no withdrawals and a steady 5% interest rate, the account would grow to €162.889,46 for a nice gain of €62.889,46. Without compounding, that amount would be €50.000, making compounded gains worth 25,78% more. Should you remain compounding for another 10 years, the difference would be even greater, in fact much greater, due to the non linear growth. Instead of just doubling (which would turn your €62.889,46 into €125.778,92), you would actually have accrued €265.329,77.
Now let’s compare both over a 10, 20 and 30 year period:
€100.000 at 5% APR after 10 years without compounding the interest: €150.000
(5% annual return, 50% overall)
€100.000 at 5% APR after 10 years with compounding the interest: €162.889,46
(6,29% annual yield, overall 62,9%)
€100.000 at 5% APR after 20 years without compounding the interest: €200.000
(5% annual return, 100% overall)
€100.000 at 5% APR after 20 years with compounding the interest: €265.329,77
(8,27% annual yield, 165,33% overall)
€100.000 at 5% APR after 30 years without compounding the interest: €250.000
(5% annual return, 150% overall)
€100.000 at 5% APR after 30 years with compounding the interest: €432.194,24
(10,73% annual yield, 332,19% overall)
And now an example of a 7% APR after 30 years, to illustrate the importance of every percentage point of APR when compounding:
€100.000 at 7% APR after 30 years without compounding the interest: €310.000
(7% annual return, 210% return overall)
€100.000 at 7% APR after 30 years with compounding the interest: €761.225,50
(22,04% annual yield (!), 661,23% overall)
(For comparison, 7% APR compounded over 10 years = €196.715,14; 20 years = €386.968,45)
So as you can see, the difference between a 5% APR and a 7% APR over a course of 30 years of compounding is astonishing. The higher the interest rate, the more steep the benefit of compounding becomes, and the longer you continue re-investing, the less linear the benefit of compounding becomes. It can actually add up to a quite a difference over time, and you gain much more than you would by just piling up the interest and putting it aside.
Furthermore, the effects of compounding strengthen as the frequency of compounding increases. The more often you can compound the better. The above examples assumed you compounded your returns once a year. However, the more compounding periods throughout this one year you have, the higher the future value of the investment, as you start earning interest on your interest sooner. So naturally, two compounding periods per year are better than one, four compounding periods per year are better than two, and so forth.
CumRocket and the Power of Elon Musk Tweet
When Elon Musk tweeted “Canada, USA, Mexico”, spelling out an acronym “CUM”, many assumed he was referring to the “United States–Mexico–Canada Agreement” (former NAFTA), but with an Elon Musk twist. Because you know… it would make for a totally better acronym than what they came up with (USMCA).
Or maybe it was just me?
Low and behold, barely a day later Musk decides to bless us with yet another tweet, this time dispelling any doubts one might’ve had regarding the meaning of his previous tweet.
CumRocket To the Moon
Within literal minutes of his “Cum Rocket to the moon” tweet on June 5, CumRocket (CUMMIES) skyrocketed from $0.067 to $0.284 (+330% instant gain) before crushing back down to $0.114 some half hour later, and is currently trading at $0.1746 (+168.95% 24hr gain).
Spaniards to Be Taxed on ‘Overseas’ Crypto Holdings
As reported by El Economista, the Spanish parliament has voted in favor of a controversial new law that will require Spanish citizens to report their overseas crypto holdings, as the government appears ready to impose more control and regulation over the growing crypto sector.
According to an official government release, the new law will require Spaniards “to report their holdings and operations with cryptocurrencies,” on crypto held both domestically and abroad if the transactions “affect Spanish taxpayers.”
According to the release, information will be required on the balances and holders of the coins, as well as on all types of operations that have been carried out with them.
“Due to their proliferation and popularity among investors and savers, it is necessary to take greater control over cryptocurrencies”
The new regulations will make it “mandatory to inform” the tax body on annual declarations of assets and property.
The bill, named the ‘Law on Prevention and Fight Against Tax Fraud’ (Ley de Medidas de Prevención y Lucha contra el Fraude Fiscal), also contains other provisions intended to fight tax avoidance, and will give tax bodies the power to conduct spot checks on “homes and businesses”.
The bill has been in the works since last year, when the Council of Ministers gave it the green light, and still needs to be ratified, now that the senate voted in favor in a majority vote.
Once ratified, it will see “overseas” crypto holdings integrated into the often criticized Modelo 720 system, which requires Spaniards to complete exhaustive declarations of their overseas real estate holdings.
Charles Hoskinson Explains Why He Believes Cardano Is Superior to Ethereum 2.0
While Cardano (ADA) supporters like to refer to it as an Ethereum killer, Charles Hoskinson, founder of Cardano, said that Ethereum is actually “killing itself” by replacing the current proof of work (PoW) version with Ethereum 2.0, a new proof of stake (PoS) iteration.
When asked if Ethereum 2.0 could also be seen as a Cardano killer, now that it’s switching to PoS as well, Hoskinson said that he does not see it like that since Cardano is the market leader in PoS, implying hat their longer experience with PoS gives it an upper hand over Ethereum in PoS space:
“We are leading that fight. We were first to the market… Engine doesn’t make a BMW a BMW. It’s a part of it, but you need a whole ecosystem, a whole collection of things.”CHARLES HOSKINSON, MAY 26, 2021
Subjective: Assigning such prominence to the fact that Cardano was the first to market with PoS over Ethereum sounds like a weak argument seeing as Ethereum, along with Bitcon is becoming a household name, whereas Cardano… well, is not yet. So this whole argument of “first to market” that is based solely on the validation protocol being used falls somewhat short and makes us seriously wonder why Mr. Hoskinson would spit in his own cup by implying that being first to market carries such weight, seeing as ETH is actually the grandfather of smart blockchain and the true pioneer of the said space.
Fun fact: The first cryptocurrency to adopt the PoS method was Peercoin. Next, Blackcoin, and ShadowCoin soon followed suit.
Governance, interoperability, and user bases
The creator of Cardano also touched the topic of governance, saying that Ethereum 2.0 has bowed out, which he said would make it hard for the ecosystem to evolve once its founders retire or lose prominence, whereas enabling on-chain governance is a vital part of Cardano’s roadmap.
He also compared Bitcoin (BTC), the largest cryptocurrency by market capitalization, and the grand father of all cryptocurrency, to a “wood-powered steam engine” due to its slow evolvement.
“You have those Bitcoin core developers who desperately want to evolve the system: even though core developers want to implement multiple improvements like smart contracts and side-chains, they can’t get anything done.”CHARLES HOSKINSON, MAY 26, 2021
Hoskinson also pointed out that Ethereum is not as interoperable for now as some other similar blockchain projects such as Cardano, Cosmos and Polkadot (among others) that made sidechains available on their network.
And finally, he claims that Eth 2.0 and Cardano on top of different technologies and philosophies also have different user bases:
“We are bringing millions of people in Africa that simply Ethereum doesn’t seem to care about… outside of South Africa and a few well developed places in Africa.”
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