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Compound interest refers to the profit obtained from your property from the initial amount and cumulative profits of previous periods. One of the best ways to invest in digital currency, securities, stock market, gold, etc. is to use compound interest.
Compound interest in digital currency is an important concept in financial markets that refers to the possibility of increasing profits based on previous interests. In the digital currency market, this profit is used as a powerful tool to increase investment growth and profitability. Investors can know the amount of significant capital in the long term with the monthly compound interest calculation formula and compound interest calculation.
Read more: Learning to invest in digital currency
Given that currently, concern about financial risk in the digital currency market has turned into concern about choosing the best investment method; Compound interest has helped many investors achieve their financial goals.
However, few people currently use the compound interest strategy in digital currency. Understanding this concept not only makes investing in cryptocurrencies more exciting, but its effects will be seen in other aspects of people’s financial lives. For this purpose, I will further discuss this concept and how to calculate compound interest and the formula for calculating monthly compound interest.
What is interest or compound interest?
Compound interest arose in medieval Europe based on a financial concept rooted in simple interest. Simple interest was often used to calculate interest on investments and loans. But the concept of compound interest, derived from simple interest, was proposed by James Brown, a Scottish mathematician, in the 17th century. Brown described the concept of compound interest in his book Arithmeticae Quadrature in 1714. In this book, he mentioned that in compound interest, the profits of the year are added to the original capital, and in the following year, the profit is calculated on the new asset. Gradually, this idea replaced the concept of simple profit in the field of business and investment.
By reading the book The Compounding Effect by Darren Hardy, you will learn more about the concept of how compound interest can surprise your capitalist life in the long run.
Compound interest means capital growth. The calculation of compound interest is based on the combination of annual profits with the original capital and previous years’ profits. In the compound interest strategy, new profits are added to the original capital, and in the following years, the calculation is based on the profit on the new capital. In this way, the capital grows every year and more profits are created.
This process continuously makes the amount of compound interest significantly higher than the profit of conventional methods and will have a high growth due to the long-term impact on the capital. Compound interest is usually used in long-term investments in industries such as investment, banking and insurance and can be calculated semi-annually, annually, monthly and quarterly. Compound interest in digital currency provides conditions for obtaining more profits due to significant price fluctuations.
Method of calculating compound interest
One of the common mistakes of traders is entering the digital currency trading market without sufficient knowledge and training of digital currency.
The increasing interest of users in the digital currency market and the introduction of new digital currencies drives many people towards this market every day. These newbies forget investment strategies in the initial process.
Some people enter this risky field with only their life capital, and others start buying new cryptocurrencies without knowing the market. The important principle in compound interest, in addition to having the spirit of capitalism, is patience. Remember, one of the most important principles that a trader or investor should pay attention to is calculating the rate of return on investment.
Read more: Spirit of Capitalism or Protestant Ethic
The increasing interest of users in the digital currency market and the introduction of new digital currencies drives many people towards this market every day. These newbies forget investment strategies in the initial process.
Some people enter this risky field with only their life capital, and others start buying new cryptocurrencies without knowing the market. The important principle in compound interest, in addition to having the spirit of capitalism, is patience. Remember, one of the most important principles that a trader or investor should pay attention to is calculating the rate of return on investment.
Compound interest strategy training in digital currency is suitable for people who are aware of the pump and dump of the cryptocurrency market, who are not easily fooled by the whales of the cryptocurrency market.
You can calculate your interest or profit by using the monthly or annual compound interest calculation formula. The formula for calculating monthly or annual compound interest is as follows:
A=P(1+r/n) (nt)
| مفاهیم | معانی |
|---|---|
| A | The final profit or the final value of the obtained investment |
| P | Initial investment amount |
| r | Interest rate (expected interest rate per transaction) |
| n | Compound interest times (the number of times we have earned money with this interest in a certain period of time) |
| t | Time to invest |
What is rule 72 in calculating compound interest?
Based on the rule of 72, which is a simple way to calculate the time required for the investment to double, you only need to divide the number 72 by the interest rate received, and the result shows the approximate number of years required for the investment to double.
In other words, if the interest rate is 8%, it will take approximately 9 years to double your capital (the result of dividing 72 by 8).
Example of compound interest table
Based on the table below, I will give an example to better understand the concept of compound interest. Imagine you have $10,000 in your account and it earns 5% interest annually. The amount of your capital after 10 years is obtained from the calculation of compound interest based on the following table.
| طول دوره | سرمایه اولیه ($) | سود با نرخ ۵% ($) | سرمایه نهایی ($) |
|---|---|---|---|
| first year | 10,000 x 5% | 500 | 10,500 |
| second year | 10,500 x 5% | 525 | 11,025 |
| third year | 11,025 x 5% | 551.25 | 11,576.25 |
| forth year | 11,576.25 x 5% | 578.81 | 12,155.06 |
| fifth year | 12,155.06 x 5% | 607.75 | 12,762.82 |
| sixth year | 12,762.82 x 5% | 638.14 | 13,400.96 |
| seventh year | 13,400.96 x 5% | 670.05 | 14,071 |
| eighth year | 14,071 x 5% | 703.55 | 14,774.55 |
| ninth year | 14,774.55 x 5% | 738.73 | 15,513.28 |
| 10th year | 15,513.28 x 5% | 775.66 | 16,288.95 |
R: 0.05
n: 1
t: 10
A=10000(1+0.05/1) ( 1 x 10 ) = 16288.95
Therefore, in calculating the compound interest, your compound interest after 10 years in this investment is equal to 16288.95 dollars. This table and formula for calculating monthly and annual compound interest can be used to invest in the cryptocurrency market.
Benefits of compound interest in digital currency
Compound interest in digital currency can bring many benefits to an investor, all of which will lead to rapid wealth growth. In the following, I will refer to the benefits of compound interest in digital currency:
Creating wealth in the long term and helping to save and invest
Combining investment and saving skills will help you build wealth in the long run.
Reducing the risks of wealth erosion
Increasing interest gradually can reduce the risk of wealth depreciation over time. This also causes the factors that lower the value of your wealth to decrease. For example, inflation and the increase in the cost of living, which cause a decrease in purchasing power.
Useful in loan repayment
When you deposit more than the minimum amount considered to pay the loan, it causes you to pay less interest.
The bank interest calculation system is not based on compound interest; Because if used in this way, the banks will go bankrupt quickly. Therefore, you will not be able to achieve compound interest by saving in the bank.
The best way to earn compound interest is to invest in the capital market, digital currency and securities.
