The magic of compounding 🪄

When I first discovered compounding of investments, something ‘clicked’ in my head. “So this is how people get rich with investments”, was my first thought. It makes perfect sense to me that people with patience and discipline often prevail over people without those qualities, investing is no exception to this rule.

People with patience will see the full power of compounding come into fruition, by not liquidating early and breaking the compound cycle. People with discipline will bite through the days where their portfolio sees red (and yes, they will come), to allow compounding to do its work.

That’s the thing with compounding, the longer you let it do its work, the better your results will be. This is why people often say that compounding creates a snowball effect. Take the following graph:

graph from https://www.stakingrewards.com/calculator?asset=solana

By reinvesting your staking rewards for Solana to your principal, you create an exponential curve (light blue line). This is why compounding is so beautiful. The longer you compound, the higher your rewards every time they get paid out. Imagine a $100 investment with a 10% APR. After a year, you would have earned $10. If you choose to reinvest this amount to your principal, you have an investment of $110. After waiting for a year, you would now earn $11 instead. This cycle can repeat itself and grow exponentially, hence the snowball effect.

If you wait long enough, compounding can make a big difference. In the case of an initial investment of $10.000 Solana, with an APR of 6%–7%, you would earn $4.025 in rewards over 5 years with compound interest . This lays in stark contrast to the $3.398 you would have earned without compound interest. As an investor, compound interest is your best friend 📈!