Why the value of money over time matters for your investments

TL;DR The value of money over time tells us that an amount today is worth more than the same amount in the future because you can earn returns by investing it now. This concept can be expressed through formulas for present value and future value, and is affected by both compound interest and inflation. For crypto investors, it is crucial to understand when to buy, stake, or wait for better opportunities.

Basic Principle: Why Time Matters for Money

If you're wondering whether to take a smaller raise now or wait for a larger one at the end of the year, you encounter a classic dilemma that economic theory can help solve. The value of money over time is not just academic – it is a practical guide for any financial decision.

Let's take a concrete example: You lent a friend 1,000 USD, and they now need to pay it back. Your friend offers to give you the money today, but otherwise, they are going on a year-long trip around the world. You can get it back when he/she returns – if you want to wait.

If you choose to wait, you lose the opportunity to invest the money now. Furthermore, inflation means that 1,000 USD in 12 months will have less purchasing power than today. To make it worth the wait, your friend needs to give you more than 1,000 USD – at least a compensation for the potential earnings you could have reaped.

Present Value and Future Value: Two Sides of the Same Coin

To assess the value of money over time, we need to be able to calculate what money in the future is worth today (present value), and vice versa – what money today will be worth in the future (future value).

Future value indicates how much your money will grow. If you invest 1,000 USD today at an annual interest rate of 2%, you will have in a year:

FV = 1.000 USD × 1.02 = 1.020 USD

In two years it will be:

FV = 1.000 USD × 1.02² = 1.040,40 USD

The general formula is:

FV = I × (1 + r)^n

Where I is the principal amount, r is the interest rate, and n is the number of time periods.

Present value does the opposite. It tells you what a future amount is actually worth today. If your friend says that he/she will give you 1,030 USD in a year, you can calculate whether it is a good deal:

PV = 1.030 USD ÷ 1.02 = 1.009,80 USD

The present value is 9.80 USD higher than what you are getting now – so it would be worth waiting. The general formula is:

PV = FV ÷ (1 + r)^n

These two formulas are fundamental for understanding the value of money over time in any context.

How compound interest amplifies the value of money over time

Interest creates a snowball effect over the years. What starts as a small gain becomes much larger if the interest itself earns interest.

If the interest rate is calculated more than once a year – for example, quarterly – the money grows faster. The formula becomes:

FV = PV × (1 + r/t)^(n×t)

How many times is the interest credited per year.

With an annual interest of 2% on 1,000 USD, you get 1,020 USD. But with quarterly compounding:

FV = 1.000 USD × (1 + 0.02/4)^4 = 1,020.15 USD

It's only a difference of 15 øre over one year, but over longer periods or with larger amounts, the difference becomes much greater. This is why long-term investment is rewarded so generously – compound interest works constantly for you.

Inflation: The Hidden Counterweight to the Value of Money Over Time

What does a 2% interest rate mean if inflation is at 3% annually? In such a situation, you are actually losing purchasing power even with interest earnings.

Inflation is measured through various price indices, and it can be difficult to predict. During wage negotiations, we often see that workers negotiate based on the inflation rate rather than the market interest rate – to maintain their purchasing power.

Inflation significantly affects the value of money over time, but it is difficult to incorporate into future forecasts. The most important thing is to be aware of it when making economic decisions.

The Value of Money Over Time in the Cryptocurrency Market: Practical Choices

In crypto investing, you often face the choice of whether to trade now or later. Locked staking is a classic example: should you hold your Ether (ETH) now or lock it for six months for a 2% annual return?

You can find other staking options with higher returns. Simple calculations of the value of money over time help you assess which option is best.

A more abstract question is: when should you buy Bitcoin (BTC)? Although BTC is called deflationary, the supply actually increases slowly until a certain point – which means that it is technically inflationary for now. Should you buy for 50 USD BTC today or wait until next month's paycheck?

The value of money over time suggests that you should buy now – but with volatility in the BTC price, the situation is more complex. Here you need to weigh time value against price risk.

Apply the value of money over time to your financial decisions

You are probably already using this concept intuitively. Interest rates, returns, and inflation are part of everyday decisions.

The formalized versions we have reviewed are particularly important for larger investors – even a fraction of a percent means a lot for their profit.

As a crypto investor, you must remember the value of money over time when determining where and how to invest – to ensure the best possible return over time.