Lately, or to be more concise the last month or so we had almost every day bad weather, with rain, strong winds, or a combination of both... Luckily, in the part where I live, we didn't have floods, but some other towns close to us did... Whenever the rain would stop, I have tried to go for my daily walk, and for only ONE day, we had clear skies! I went out, and took a short "walk and talk" video... And it didn't go well... lol... If you want to have some laughs, you can check out the video... If you are here only for thoughts about compounding, you can continue reading...
So, what is compounding? According to Wikipedia, this is a definition of compound interest:
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
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For many people in crypto, it is a dream about making big money! :) But, as always, along with the good sides of compounding, there are some bad sides to doing it...
Firstly, the good side of compounding is that you can earn a lot more by doing it in a certain period of time, than not doing it... Of course, IF you withdraw your principal sum and profits after X days/week/months/years... And that's where most problem fails... It looks so simple, but we have our human nature on the other side that stops us from doing it...
At the moment when we SHOULD cash out, we start dreaming about millions and millions... It's something like when you are gambling and having a lucky streak... And you think it will last forever like that, and you gamble until you lose it all... But, compounding is maybe even worse as you have a feeling that you are having more and more money, which actually, isn't true...
If you are compounding, you have invested your crypto/money on some platform, smart contract, or something third... Those assets aren't in your ownership (not your keys, not your crypto...), but in another place which directly means that you aren't winning (or losing) until you CASH OUT! Many people forget about that...
It's very similar to when people say that they have lost money on crypto when they bought some tokens at a certain price, but they dropped in value... You have lost money in the moment when you have withdrawn (sold) your crypto asset for cheaper than you have bought... If you are HODLing, you still have a chance to WIN at the end...
Back to compounding... I have picked this topic as nowadays, there is more and more Defi project out there and not all of them are valid and honest... Many of them have some juicy rewards at the beginning and it's hard to recognize which one is reliant and trustful... The thing is that even those that are can have nice APRs at the beginning...
Now, if you add to that already juicy APRs the power of compounding, you can get some very interesting numbers... That is probably where our human greed comes to the surface... We compound it all and watch how the number grows... Until we got scammed and lose everything...
But, there is a "half-solution" to the problem of staying safe, but still, enjoying compound interests... When you have a chance, cash out a PART of your profits and compound the rest! In that way, you will get back part of your investment during the riskiest period (and most often the most profitable), but still grow your part of the cake...
You will maybe earn less in the long run, but if something goes wrong, you will not regret being too greedy!
Thank you for your time,
ph
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