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 You have lost money in the moment when you have withdrawn (sold) your crypto asset for cheaper than you have bought...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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I always think it's smart to take some profits every now and then. Prices are unpredictable and you never know what will happen. Of course, compounding is also quite important in the long run.
It's too bad about the fall but I hope you legs feel better soon.
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Especially in the crypto jungle as there are many tokens/projects run by people that have no idea about tokenomics... So, it's smart to pull out some tokens from the table...
Thanks... It is already better, but needs a bit more time to heal 100% :)
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The success of compounding comes from taking profits regularly. Almost every Defi project and blockchain project out there has a prabole ligne over time. Huge APR's at the beginning then flattening APR with slow or quick value decrease. In a way the tokenomics only define the speed of the evolution. The pattern is always the same and it's a good idea to take out profits on a regular basis to make a profit at all.
Taking profits early is killing that parabolic way of compounding, but it's the fastest way to return your investment if you sell on the top... :)
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Compounding or reinvesting makes sense, because that's how you grow your investment without bringing more outside money. But taking profit out is also important.
There are two problems here from my experience. Not taking more profit out when the price is high and less when the price is low is one of them. Psychologically, we are inclined to do the reverse. Compound the high rewards, and take out when it crashes.
The second one is over-diversification. Most of us do it, one way or another in crypto, and that's really detrimental, because we simply run out of time to manage all the investments, not to mention knowing the ins and outs for each of them (at least the core ones).
Agree with you regarding these problems that you listed... The first one, with selling low, and not taking profits high can be solved and "trained"... lol... But, it needs time and patience...
And tbh, I had the second one experienced too on my own skin... lol... remembered my beginnings in crypto in 2017, when I bought a bunch of shitcoins that I "thought" will hit the moon... of course, most of them have died, or they are near to (ground, not the moon) zero... lol...
I still have gazillion tokens on Hive-Engine, and on other blockchains, but I exactly know which one do I hold for the long term, and which ones are just to take some short-term profits...
Of course, nobody is perfect, and we all have our "hopes and dreams" in some shitcoins.... hahahaha...
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Interestingly, I haven't been taking profits on cryptos (since I don't need the money urgently). Sometimes it's good, sometimes it's bad. Haha.
Well, it's more about taking out profits from a certain "project" that you are, and distributing it to maybe some other too... I'm in a similar position to you, taking out fiat money only when I really need it... Until then, I'm moving it around different Defi, staking tokens, HIVE, etc...
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Yeah I guess converting tribe token to Hive or HBD could count as "taking profit". As for Splinterlands assets like cards, I am not sure how exactly to take profit since I need the CP haha.
Hmmm... Regarding Splinterlands, I'm pulling out some DEC and putting it inside the diesel pool... It counts as a cashout, but in a nutshell, I'm investing there to get more SPS tokens from the airdrop... hehe...
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That's playing it smart, I was trying to do the same this week by selling my GF Cerberus and buy another RF Cerberus and take what was left off the top to cash out a few dollars but instead I sold it for 1% of its worth and put a period where I shouldn't have so I crashed this time trying to compound some profit. :(
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A month ago I have begun with my "cards reorganizing' in the Splinterlands... As I have many cards that I don't use, I have checked firstly their renting APR, and if it was under 5-6% per year, I have put them on sale... When I sell some, I usually buy newer cards that I USE in battling... Have no idea if that's a good way to do things, but if they are just in my deck doing nothing, that's not good :)
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