Welcome, in this article we will compare the best compound interest accounts and staking rewards.
In addition we will discuss why it´s so important to achieve the compound interest (interest on interest) effect, especially on a long-term perspective.
If you are interested in receiving the best interest on your crypto holdings, you should check out the best crypto interest rates.
What is Compound interest?
Compound interest is the interest on a deposit calculated based on both the initial principal and the accumulated interest from previous periods.
Another common expression for compound interest is “interest on interest”. It simply means that you also earn interest on the received interest payouts.
Simple Interest VS Compound Interest
Interest can be either simple or compounded.
- Simple interest is based on the principal amount of your deposit.
- Compound interest is based on the principal amount and the interest that accumulates on it in every period.
Simple interest is calculated only on the principal amount of a deposit. It is easier to determine and compare simple interest. All our interest rates compared are simple interest rates even though most companies allow for compound interest earnings in some way.
Yearly, Monthly, Weekly and Daily Compound Interest
The rate of compounding effect depends on the frequency of the compounding periods. A compounding period is often similar to interest payout frequency.
Usually, crypto interest accounts payout interest and compounds on monthly, weekly or daily basis.
In the table below, you can see how different companies pay out the interest and how frequently you compound your interest earnings.
- Automatic: The payouts goes directly into the interest account
- Manually: You have to deposit the interest payouts into the interest account
*Interest paid out after locking period which can be 7, 14, 30, 60 or 90 days.
Crypto APY VS APR?
Most crypto lending and crypto interest accounts give their yields as APR or APY
APR stands for annual percentage rate. APR does not take compound into account. For marketing purposes, this is more applied to money you borrow, like with a credit card, car loan or personal loan.
APY stands for annual percentage yield. APY does take compound into account. For marketing purposes, APY typically applies to money you place in a savings account or interest account.
Crypto.com is using the term % p.a. which means percentage per year.
What is return of investment (ROI)?
Another common financial term used is ROI, or return of investment. This is not so common to use to compare interest account since they rather use APY as described above.
ROI is used to compare an investment in Bitcoin versus stocks, for example. An example would be that your are about to invest $1000 over a three years period and you want to know the predicted ROI before making your investment.
Sometimes ROI is given is a percentage number and some times a multiple number.
Crypto Compound Interest Calculations
Here, we will explain cryptocurrency compound with some calculations.
Basically, there are three different ways to HODL your cryptocurrencies.
- HODL with no interest
- HODL with simple interest
- HODL with compounding interest
Let´s make an example with calculations. Pretend we have Bitcoin worth $1000 today and we HODL for 30 years. For simplicity, Bitcoin doensn´t gain anything over 30 years in value (unlikely). The calculations are based on a 10% interest rate.
- HODL with no interest, $1000
- HODL with interest, $4000 ($100 per year in 30 years)
- HODL with compounding interest, $17449 (1000*1,1^30)
Is it important to Compound crypto interest Earnings?
As you can see from the calculations above its important to compounding your earnings from crypto interest accounts.
However, the most important thing to remember is to do manually compounding where automatic is missing.
If the compounding is made automatically monthly, weekly or daily will not have a major impact. However, if all things are equal we would prefer to go with the daily compounding over the monthly compounding. But remember. it´s more important to find the best crypto interest rates APY than finding the most frequent compounding account.
risks with Crypto investments
In the end, risks are the most important factor to handle when it comes to investment, in particular with crypto.
Do not stare blindly on the interest rates and if compound is accessible or not.
Always ask yourself the question if the service you are about to use are secure and have a history. Read more about how to handle risks in our article about crypto risk management.