Unlocking Financial Freedom (with Crypto) – The Power of Compounding

I am not a financial management expert and I generally don’t write about this topic, but I’ve learned valuable lessons on my journey towards financial freedom. Here are some insights that have helped me, and I hope they can assist you too. I am using this with crypto investing to super charge the growth, getting around 50%+ annualised return for 2 years or so far. You don’t even need crypto to have good results, anything that is compounding well above inflation and typical interest rates will do. * Standard disclaimer applies, not financial advice, do your own research DYOR.

I chose a couple of modest crypto bot trading strategies and just left them running for over 2 years. And the results are clearly reenforcing the ideas listed below. Compounding is a very efficient way to get to financial freedom. Most jobs and even running your own startups or business can’t beat the compounding growth of crypto investment even with a modest treasury/capital amount. Bitcoin grew by 330% in 2.3 years and it is still going strong, some other crypto projects can even outperform BTC. My main rebalancing strategies netted 370% and 411% for same period. Not exactly a science, but it is about picking a few projects that you feel will grow well, put them into a rebalancing arrangement and watch them grow as a group. But the underlying principles are explained below.

Embracing the Exponential World

We live in a world driven by exponential growth, where changes are not merely linear. This concept can be challenging for us to grasp, especially since much of basic mathematics we learn in school focuses on linear relationships or generally A4 paper calculable questions. In the early stages of exponential growth, trends often appear like linear, flat and slow, leading us to underestimate their potential. However, recognizing the exponential nature of these trends is crucial for achieving long-term financial success.

At first glance, the rapid transformations driven by exponential growth may not seem evident. Yet, adopting a medium- to long-term perspective can significantly accelerate your journey toward financial freedom. It’s important to note that many growth patterns are actually sigmoid in nature. As the renowned AI scientist Yann LeCun observed, “The beginning of a sigmoid looks like an exponential.” This insight highlights the complexity of growth trajectories and underscores the importance of understanding these dynamics for effective decision-making.

The Power of Compound Interest

One of the most significant principles in finance is the power of compound interest. Albert Einstein referred to it as the “eighth wonder of the world,” adding, “He who understands it earns it; he who doesn’t pays it.” Successful investors leverage compound interest to grow their wealth over time. Consider money as similar to energy: it cannot be created, only transferred. Those who fail to make their money work for them ultimately end up transferring it to those who do.

But it is hard to tell if such compounding effect was carefully designed in our financial systems or just an unintended result of having to address the greed in human nature. Expecting more in return if we lend out something, rather than a fair return. We had to formulate such greed with maths, rather than the traditional imprecise goodwill from borrowing a bit of sugar from a neighbour and getting some salt next time.

The Rule of 72

To appreciate the impact of compound interest, it’s helpful to learn about the Rule of 72. This formula estimates how long it takes for an investment or debt to double:

72 ÷ annual interest rate (%) = number of years for money to double.

This quick calculation can help you visualize the potential growth of your investments and understand the cost of debt.

The Challenge of Accumulating Your First $100,000

Charlie Munger famously stated, “The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.” This sentiment resonates with many because accumulating your first $100,000 can be challenging. Even with a modest 7% return, it takes approximately 10 years to double your money, that is to say, you need to accumulate 50k then wait 10 years to double by compounding at 7%, not easy for most people. However, once you reach that milestone, the growth becomes significantly more rewarding.

The Exponential Growth of Investments

Once your initial investment crosses the $100,000 mark, the magic of compounding starts to work in your favor. Your money begins to generate money, creating an exponential growth effect. This is where the journey to financial freedom truly begins.

Working vs. Investing

It’s important to realize that no matter how hard you work, your efforts are highly unlikely to match the long-term compounding effects of investing. Job promotions, pay raises, or starting a business may not yield the same exponential growth. To achieve financial freedom, you need to prioritize investments that compound over time. Work to earn more capital for investing in compounding investments.

Getting Started Early

The key takeaway is to start investing as early as possible. Seek opportunities that allow your money to grow exponentially. Whether through stocks, mutual funds, or real estate, the sooner you start, the greater the benefits of compound interest will be. “It takes money to make money”, the earlier you stop questioning these, the quicker you will start taking actions.

References

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