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Tuesday, October 27, 2020

The Behavioral Crossroads of Compound Interest and Cryptocurrency Investing

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Investors who follow the principle of compound interest know that there is more than just understanding the mathematical progression of how your money will appreciate over time; that is the easy part. To make your investment truly exponential, you need to be disciplined and proactive, which means sticking to your strategy and increasing your contributions.

The Similarities of Cryptocurrency and Compound Interests

Believe it or not, the underlying philosophy of compounding is actually practiced by some cryptocurrency enthusiasts. A recent survey among a thousand investors who hold the Ripple digital currency, which trades under the XRP symbol, revealed that most of them are in it for the long run. Similar to investors who believe in the power of compound interest, 72% of XRP investors have no plans to sell their stake; moreover, a little over 80% of the investors surveyed will not liquidate their stake in Ripple even if its exchange price suddenly reached $10 today. Finally, about 40% of these investors plan to increase their stake in XRP.

It goes without saying that compound interest investing and cryptocurrencies are not in the same ballpark, but it is interesting to note that their investors share some traits with regard to vision and persistence. If compounding and XRP fans got together at a poker tournament, chances are that they will be the “all-in” players at their tables. Furthermore, both kinds of investors are liquid because they are not holding equity securities or options.

Uncertainty and Risk in Cryptocurrency Investments

Speculation is the line that separates compound interest investors from their XRP counterparts. The uncertainty and risk that XRP investors face are significant. Even though Ripple holds the third spot on the cryptocurrency charts in terms of market capitalization, it is quite the stretch to fervently believe it will one day reach a currency exchange level near $100. Compounding investors, on the other hand, hold conservative financial instruments that carry far less risk and are unlikely to appreciate by leaps and bounds like Bitcoin and other cryptocurrencies.

The thought of depositing $1,000 at 1% with a monthly contribution of $5 in order to cash out at $1,732 in ten years is not something that will appeal to active investors, but it is a strategy that has paid off for many individuals, particularly those who increase their contributions whenever possible. Day traders would scoff at these baby steps, but they truly pay off in the long run. As for XRP investors, uncertainty usually gets the best of them.

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