How to Double Your Money or Debt

The Law of 72

I admit this title is a little clickbaity. The process of doubling your money in cryptocurrency is actually pretty cut and dry as well. Just buy bitcoin and wait a couple of years. The numbers are pretty concrete on this, bitcoin gives an annualized year over year return of about 200%. To be clear, thats a compounding doubling of your investment. In the last decade, if you bought and held bitcoin, you would be up 5.2 million percent. This does put bitcoin squarely in the category of being the single best (financial) investment in human history.

If you’ve read other letters of mine, you know I like making money and this is what brought me to bitcoin in the first place. The gains is not what has made me stay however, because I realized there is something bigger than my own savings and financial wellbeing to consider. I stay with bitcoin because of the philosophy around it, and its potential to change the way the world uses money.

Bitcoin has also led me to learn more about personal finance, investments, and the law of 72. Had I learned about the law of 72 earlier, it would have stopped me from entering into a pyramid scheme in the nascent days of my investing career.

How I Got Scammed into A Pyramid Scheme

I came across a website offering “cloud mining” of bitcoin. I could buy hash power from the site and be rewarded with bitcoin on a daily basis. I don’t remember the ROI they were promising me, but it was in the neighbourhood of 300-400% APY.

I was too young and naive to understand that this sort of return was unreasonable.

I had no experience investing in the stock market, or anything else for that matter. I just thought it was possible “because it was bitcoin mining”. This is why it is important to familiarize yourself with interest rates. It can help you avoid bad investments, but also bad loans.

Imagine instead that I was seeking a loan, and I went to a payday office where 40-60% interest rates are the norm. I might be thinking I am getting a good deal when in reality, I am signing away from future.

I think a functional understanding of interest rates, and how it relates to time is paramount in financial literacy.

For example, asking yourself these two questions can help save you a future loss.

For example, you can ask yourself two questions in order to gauge the efficacy of any investment, or debt.

• How long does it take to double your money in an investment?

• How long does it take for your debt to double when taking on a loan?

The Law of 72

The law of 72 is a very simple tool that should be in everyone’s financial literacy toolkit. It answers a simple question about growth of an investment, or the rate at which your debt increases.

How long does it take for your investment to double? It depends on your rate of return (APY, ROI, interest rate, lending rates, etc).

Take whatever you are earning as a yearly APY (Annual Percentage Yield) and divide it into 72. The resulting number is the number of years that it takes to double with that particular annual rate. Let’s look at some examples.

8% is 72 / 8 = 9 years

10% is 72 / 10 = 7.2 years

20% is 72 / 20 = 3.6 years

The higher the rate of return, the faster you will double your money. Of course this formula also works with calculating how quickly your debt will grow. This might give you a bit more perspective into why your 20% credit card should be paid off every month. It doesn’t take very long for compound interest to make your credit card debt get out of control.

What is a reasonable APY (yield)?

The next question you might be asking yourself is what is a reasonable yield to receive? This question is important because otherwise, you can be fooled into believing that a company or service can give you some insanely high yield on your investment (like I was). The typical benchmark is 8%. This is what your financial or investment advisor will tell you that you can get on the stock market in a typical mutual fund or index fund.

Stablecoin Yield Farms

I am currently building up an amount of USD stablecoins (USDT, USDC, DAI, BUSD) to safeguard, and protect against volatility. I was too exposed to losses during the downturn in Q2 of 2021. After revisiting my strategy of having everything in bitcoin, a chunk of stablecoin can help me better manage volatility. A question emerged after making this decision to hold a reasonable amount of stablecoin ($10k - $25k) for a rainy day. What do I do with it when I don’t have it working for me?

Stablecoin yield farms regularly provide an APY of 8% - 25% on your stablecoins. Keep in mind that when dealing with APYs on decentralized platforms, the APYs that you are seeing change on an hour to hour, day to day, and week to week basis. It sort of defeats the purpose of using the term APY, because it is unlikely that you’re going to get the same interest rate on your investment throughout the entire duration of a year. That’s why I’ve given such a big range of APY, because any given day when I go and look at my returns, I expect it to be different than the day before.

Nonetheless, the range I’ve given is well within the range of APY that is acceptable and makes financial sense. There is little chance of someone outright running away with my money as long as I am using a well vetted smart contract to yield farm. If I don’t trust a decentralized protocol for generating yield on my stablecoin, I can always lend to BlockFi, Crypto.com, or Binance. When earning with a centralized provider like the aforementioned companies, the rates they give are typically static, but are subject to change based on the sole discretion of the company.

When yields go above 25%, I start to wonder how those rewards are being generated, as should you. Don’t let high rewards cloud your judgement. In my experience, this ends badly.

Stay safe out there!

Regards,

Keegan