What Is Compound Interest?
Compound interest is interest calculated on both the initial principal and accumulated interest from previous periods. Unlike simple interest (which only earns on the principal), compounding creates a snowball effect — your money earns interest on interest.
In crypto, compound interest applies to staking rewards, DeFi yield farming, lending protocols, and savings accounts. Even small APY differences compound into massive gains over 5–10 years.
In crypto, compound interest applies to staking rewards, DeFi yield farming, lending protocols, and savings accounts. Even small APY differences compound into massive gains over 5–10 years.
Compound Interest Formula
The standard compound interest formula:
Compound Interest Formula + Monthly Contribution
The Rule of 72
The Rule of 72 is a quick mental shortcut: divide 72 by your interest rate to estimate how many years it takes to double your money.
At 8% APY, your money doubles in ~9 years. At 12%, ~6 years. At 20%, ~3.6 years. This is why even small rate improvements matter enormously over time.
Compounding Frequency Comparison
More frequent compounding produces slightly higher returns. Here's $10,000 at 8% APY over 10 years with different frequencies:
| Frequency | Periods | $10,000 after 10yr |
|---|---|---|
| Annually | 1/yr | $21,589.25 |
| Quarterly | 4/yr | $22,080.40 |
| Monthly | 12/yr | $22,196.40 |
| Weekly | 52/yr | $22,241.73 |
| Daily | 365/yr | $22,253.46 |
Crypto Staking & DeFi Yields
Cryptocurrency offers some of the highest compound interest rates available today. Here are typical APY ranges for popular protocols:
| Asset | Typical APY | Type |
|---|---|---|
| ETH (Ethereum) | 3–5% | Proof of Stake |
| SOL (Solana) | 6–8% | Proof of Stake |
| DOT (Polkadot) | 12–18% | Proof of Stake |
| USDT/USDC | 5–10% | DeFi Lending |
| ATOM (Cosmos) | 15–22% | Proof of Stake |
Common Compounding Mistakes
Ignoring fees and gas costs
Staking rewards and DeFi yields look great on paper, but transaction fees, gas costs, and protocol fees can eat 1–3% of your returns annually.
Not accounting for impermanent loss
Liquidity pool yields often come with impermanent loss risk. A 50% APY means nothing if you lose 30% to IL.
Assuming APY stays constant
DeFi yields fluctuate wildly. Today's 20% APY may drop to 3% next month. Use conservative estimates for long-term projections.
Frequently Asked Questions
What's the difference between APR and APY?
APR is the simple annual rate without compounding. APY includes the effect of compounding. A 12% APR compounded monthly gives ~12.68% APY.
How often should I compound?
More frequent is better: daily > monthly > annually. In DeFi, auto-compounding protocols handle this for you. In traditional staking, restake rewards as often as practical.
Is compound interest guaranteed in crypto?
No. Crypto yields are variable and carry smart contract risk, protocol risk, and market risk. Staking rewards are more predictable than DeFi yields.
Does this calculator account for taxes?
No. In most jurisdictions, staking rewards and interest are taxable income. Consult a tax professional for your specific situation.
Can I lose money with compound interest?
The compounding itself doesn't lose money, but the underlying asset can. If your staked crypto drops 50% in price, your compounded rewards won't offset that loss.
Track Your Portfolio Growth
Set up price alerts and portfolio tracking. BeCoin notifies you when your targets are hit.
Set Up Alerts — Free