Staking Coins on Crypto for Long Term Gains
Understanding the power of compound interest with crypto
The crypto investment space is getting a lot of buzz. And it should.
Unfortunately, the value of the US Dollar continues to decrease.
This isn’t a surprise to anyone who has been around for a few decades.
Things simply cost more to buy than they did in the past.
(click on image to link to source article)
What does that have to do with crypto?
Well, if you have US dollars sitting in a bank account, you have to earn a LOT of interest to overcome the decreasing value of your money.
For example, if you have $100, and it earns 1% interest each year, that is not enough to overcome 5% inflation.
It’s like swimming across the current. You feel like you are working hard, but you aren’t going to get anywhere.
It will be a sad wake up call for many hard working people when they find out that their retirement savings is not going to buy nearly as much as they hoped (or even expected).
You can put your dollars into higher yield investments, but there is risk.
There is always risk when investing, but now there is also risk in NOT investing.
What should you do?
That’s a tough question, and one that I have been exploring myself, which is why I started to learn about crypto currencies.
There is a LOT of speculation going on with crypto, and many of that simply feels like gambling.
I tend to find that high risk investing stressful, which makes it very unappealing to me.
However, there is an option with crypto that leverages the power of compound interest.
This option is called Staking, and if you are playing a longer investment game, can yield much better returns than you will ever see in a traditional savings account, CD or even in the stock market.
Staking operates sort of like a savings account, in that you deposit X amount of money into an “account”, and it accrues interest over time that compounds.
I will dedicate several posts over the next few weeks to explaining, and exploring the various options with staking, and how I play to take advantage of those opportunities.
Before I get into any specific projects, I gotta say a few things. I am NOT a financial planner or adviser.
I am a researcher who spends a considerable amount of time researching crypto coins / tokens / projects / opportunities in an effort to understand the potential upside and risk associated with crypto investments.
There is ALWAYS risk in any investment.
Please be sure to understand that there is always going to be some element of risk in any project, and when I write about a project or coin that I have researched, that doesn’t mean I am suggesting you invest your own money into that project.
While staking is less risky than some other crypto options, there is still risk.
Part of smart investing is doing your own research, and I am simply sharing what I have found in my own research to help you with yours.
Today’s Lesson is about two terms or metrics you want to understand before exploring staking with DeFi (Decentralized Finance).
But first, let’s go over what compound interest is, and how it affects an investment.
Compound Interest
Compound interest is when the money you make via interest from a given time period is invested back into the principal (the money you are making interest on).
Over time, as the principal grows, the amount of money you make in each time period also grows.
In other words, you are earning interest-on-your-interest. It’s key to taking a small amount of money and turning it into a large amount over a very long period of time.
You don’t need to calculate the potential returns by hand. If you google “compound interest calculators” you will find a lot of options. Here is one I like.
When you play around with scenarios, you will see that the serious money is made by investing for YEARS and not in a days or months.
But let’s go over two metrics that you will see with crypto staking and how they are different.
APR vs. APY
APR = Annual Percentage Rate
APY = Annual Percentage Yield
APY takes into account compound interest, and APR does NOT.
100% APR = 171% APY
200% APR = 634% APY
300% APR = 1884% APY
So, for a specific staking protocol, you will have both an APR and an APY, and the APY will always be higher than the APR.
APY > APR
So, when comparing staking two different staking options, make sure you are comparing APR vs. APR or APY vs. APY and NOT comparing APR vs. APY.
The first shock that I had when learning about crypto staking was how HIGH the APRs are vs. traditional finance. There are some CRAZY returns out there, and my first thought was that it must be a scam.
There are some shady projects, but many are legit. This is why doing research is important.
It’s also a good idea to understand how to calculate the APY so that you can verify the returns you expect to make (this is useful when deciding how much to invest).
APY = ((1+r/n)^n)-1)
r=APR
n=time period
Here is an example:
Let’s say you have a coin that compounds daily for a year with an APR of 100%. You deposit $1,000. A year later you will have $2,000. If you earn a 100% annual return over a year, you are doubling your money.
APY = ((1+100%/365)^365)-1 = 1.714 = 171.4%
Summary:
You can find very high yield staking projects that over time will generate large returns
As the US Dollar continues to lose value (buying power diminishes) look at alternative currencies that are increasing in value to protect your assets (your savings)
Research is very important because not all staking projects are legit
There is a difference between APR and APY
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Staking Coins on Crypto for Long Term Gains
Persistence is a Tendermint based specialized Layer-1 powering an ecosystem of DeFi applications focused on unlocking the liquidity of staked assets.
https://persistence.one/