How the value of money over time transforms your investment decisions

Why is receiving money today better than waiting?

Imagine that a friend owes you 1,000 USD. They offer you two options: receive it today or wait a year to get it back without having to go get it. Although it may seem like a trivial decision, behind this choice lies one of the most important principles of finance: the time value of money.

This fundamental concept suggests that the same amount of money available now is always more useful than that same amount in the future. The reason? If you receive the money today, you have the opportunity to invest it, generating returns. If you wait, you lose that possibility of making your money work for you.

But there's more: during those 12 months of waiting, inflation erodes the purchasing power of your money. The 1,000 USD you would recover in a year would likely buy fewer things than today.

Calculating what your money will be worth in the future

To make smart financial decisions, you need to know exactly how much your money will be worth at different points in time. This is where future value calculation comes into play.

Let's say you deposit your 1,000 USD in an investment that generates a 2% annual interest. After 12 months you would have:

FV = $1,000 × 1.02 = $1,020

If your friend says that their trip will last two years, then:

FV = $1,000 × 1.02² = $1,040.40

The general formula you can apply is:

FV = I × (1 + r)ⁿ

Where I is your initial investment, r is the interest rate, and n is the number of years.

Measuring the value of future promises

Now let's reverse the process. Your friend returns after a year and offers you $1,030 instead of the original $1,000 as compensation for the wait. Is it a good deal?

To determine this, you need to calculate the present value of that future promise. This tells you how much that future money would be worth in today's terms:

PV = $1,030 ÷ 1.02 = $1,009.80

The calculation reveals that your friend is offering you an additional 9.80 USD in real terms. In this scenario, waiting would be profitable. The general formula is:

PV = FV ÷ (1 + r)ⁿ

How Composition Amplifies Your Gains

This is where the power of time multiplies your returns. Compounding is the process by which your earnings generate more earnings. It works like a snowball that grows exponentially.

If your interest rate is applied four times a year instead of just once, the calculation changes slightly:

FV = PV × (1 + r/t)^(n×t)

With the numbers from the example:

FV = $1,000 × ( + 0.02÷4)^(×4) = $1,020.15

It's just 15 cents difference in a year, but with larger amounts and prolonged periods, the composition generates significant differences.

Inflation: the invisible enemy of your money

An interest rate of 2% sounds good until inflation is at 3%. Then your money is losing purchasing power in real terms.

Inflation is particularly difficult to predict and measure, as there are multiple indices that produce different results. Therefore, when evaluating long-term investment opportunities, you should subtract the expected inflation rate from your returns to obtain the real yield.

Applying this principle to cryptocurrencies

The time value of money is especially relevant in the crypto ecosystem, where decisions about money today versus future money abound.

Consider locked staking. You could hold your ether (ETH) now or lock it for six months in exchange for a 2% yield. Comparing different staking products using these calculations helps you identify the best opportunity.

Even the simple question “Should I buy 50 USD of bitcoin (BTC) today or wait for the next payment?” is resolved more clearly by applying this concept. Although BTC has unique deflationary characteristics, the TVM suggests that investing today is preferable, although price volatility adds complexity to the equation.

The practical conclusion

Although the mathematical formalism of the time value of money is especially useful for large investors and financial firms —where fractions of a percentage represent millions— it is also invaluable for individual crypto investors.

Every time you decide where and when to invest your digital assets, you are implicitly applying this principle. Formalizing it in your analyses allows you to make more informed decisions and maximize your long-term returns.