There's a classic thought experiment in the investing world that goes something like this... If I were to offer you a choice between receiving $1 million dollars today or a single penny that will double in value every day for the next 30 days, which would you choose? I'd take the million bucks, at least until knowing better. What about you?
If you took the penny and doubled the value every day for an entire month, the results start out lackluster at best but then quickly become astounding...
you would be a millionaire multiple times over within 30 days! Here's how it breaks down...
That's the power of compound interest! Of course, this example is insanely exaggerated and the chance of consistently doubling your money every day forever probably willl never happen but there are a couple very noteworthy lessons here.
The first point to remember is that when you choose a profitable investment, your money WILL GROW OVER TIME. It takes a long, long time, but if left alone, you will end up with quite a bit more money than when you started.
Second, the amount of time this takes can be significantly reduced AND the final dollar value can be significantly increased with one simple principal... by earning some form of cash flow (interest, dividends, etc) from your investment and immediately re-investing those profits. When this is done, you earn interest on your interest, and the results start compounding as in the example above. The more often you receive and re-invest profits, the faster your money will grow.
Third, and just as important, is the amount of time it takes before the full effects of compounding interest start to surface. In the example above, we see that after an entire week of money doubling, we've managed to grow our penny to a whopping 64 cents. Pocket change, quite literally. After two weeks, we're still well under $100, and the $10,485 made after week 3 seems a far cry from the $1,000,000 turned down on day 1. But then something magical starts to happen and in another 4 days our money has increased over 15 fold! From there it gets a little silly as the money grows so fast we have trouble keeping up with it.
The point is this... the hardest and most time consuming part of growing an investment through compound interest is building up a respectable nest egg in the first place. Imagine you started the example above with $10,000, instead of starting with a penny. It would only take 7 days to become a millionaire. That's over 4 times faster to reach the same goal and the only thing that changed is the amount of money we started with.
I could keep rambling about the benefits (and pitfalls) of compound interest but this article would never get finished. Instead, let's see how the ideas above can be applied to investing with Bitcoins in order to make your Bitcoins earn more Bitcoins.
There are countless ways to "invest" your Bitcoins, some are legit, quite a few are not. One method of investing with Bitcoins is to lend your Bitcoins to someone else for a length of time and then earn interest on the loan. It can be risky, but there are companies that will mediate the loans and help alleviate some (or all) of the risk.
So it's possible to loan out your extra Bitcoins and make money for doing so. Then, to do it again, only this time you make money on a bigger pile of money. The next time you make more money on an even bigger pile of money, and on and on and on. It just takes time, patience, and discipline.
Over the past couple weeks I've been playing with a couple sites that allow you to loan/invest Bitcoins in this way. Yes, my profits are starting out small, but I am re-investing ALL of them along with the principal, and I'm repeating the process as often as possible, all while protecting the initial investment.
Now that you've got a primer on the power of compound interest and see how it can be applied to generating Bitcoins, the next article will cover some of the Bitcoin lending services I've tried and my thoughts on the best ways to earn compound interest by lending out your Bitcoins.
Until then, keep letting those pennies add up!
