Why should you consider time when evaluating your money?

Have you ever thought that the Dollar you have now is not worth the same as the Dollar you will receive after a year? This is not just a theoretical idea, but a real economic reality that affects your daily investment decisions, especially in the crypto world. The principle behind this understanding is known as the time value of money – a powerful tool that helps you make smart financial decisions.

The main idea: Why now is better than later?

Imagine that your friend comes back to you after borrowing $1,000 and says: “You can take the $1,000 today, or wait a whole year and get the same amount when I return from my trip.” The two options may seem equal on the surface, but they are not really.

When you choose to wait, you are actually missing a golden opportunity. That year, you could have invested this amount in a savings account or another investment product and achieved returns. In addition, inflation means that the value of your money will decrease over time – what buys you a bag of groceries today may not buy you the same amount after a year. This is the essence of the principle of time value of money.

How do we measure the difference? Entering current and future values

To understand this principle practically, we need to talk about two concepts:

Future Value: If you invest $1,000 today at a certain interest rate, how much will it be worth in the future?

Current Value: If someone promises to give you a specific amount in the future, how much are those promises worth today?

Let's say the interest rate available to you is 2% annually. If you invest $1,000 now:

• After one year it will be: $1,020
• After two years it will be: $1,040.40

The mathematical formula for this is simple: Future Value = Principal Amount × (1 + Interest Rate)^Number of Years

And the reverse is true – if your friend offered you $1,030 after a year, and you wanted to know the value of this amount today ( at the same interest rate of 2%), you would divide the future amount by ( 1 + interest rate):

1,030$ ÷ 1.02 = $1,009.80

This means that your friend's offer is worth the wait because it is better than the $1,000 you will receive today.

The secret you may not know: The power of doubling

The situation becomes more exciting when you take compounding into account. If your money doubles more than once a year, for example every three months (, then the returns grow faster.

Instead of doubling once a year on $1,000:

• Annual multiplier: $1,020

If the doubling is every three months )4 times a year(:

• Result: $1,020.15

15 cents may not seem like much now, but imagine larger amounts and longer time periods – the difference becomes enormous. This is the secret that professional investors understand and benefit from over the years.

The Bigger Picture: Inflation Changes the Game

Here comes the real challenge. What if the interest rate is 2%, but inflation reaches 3%? In this case, your money is actually losing its value even while you are investing it. This scenario is particularly common during periods of high inflation, making it crucial to choose investments with returns that exceed the expected inflation rate.

Predicting inflation is harder than measuring interest rates, and there are several different indicators to choose from. But the basic idea remains: you need to protect the value of your actual money, not just the number of units you own.

Applying all of this to the crypto world

Now, how does this apply to the crypto world and digital currencies? The opportunities are plentiful and diverse.

Reserved Storage Products A clear example: You may face a choice between keeping Ethereum )ETH( now or reserving it for a certain period in exchange for an interest yield of up to 2% or more. At this point, you can use time value of money calculations to compare different products and choose the best one.

As for Bitcoin )BTC(, the situation is more complicated. Although Bitcoin is considered a deflationary currency with a limited supply, its new stock is currently increasing in an inflationary manner. If you are thinking of buying BTC for $50 now instead of buying it for $50 next month when you receive your next paycheck, the principle of the time value of money suggests you should buy now. However, the volatility of Bitcoin's price adds an extra layer of complexity to the picture, as the price itself can change drastically within a month.

Summary: Simple Understanding, Giant Applications

You may already be familiar with this principle even if you don’t know its official name. Every time you choose an account with a higher yield, or consider inflation when planning your savings, or decide when to invest your money – you are intuitively using the time value of money.

For large companies and serious investors, even a slight difference of 0.5% in the rate of return can make a huge difference in the long run. For you as an investor in the crypto world, understanding this concept means making smarter decisions about the timing of your investments and choosing products that maximize your real returns. Time is really money – and now you know the reason mathematically.