Time is the most valuable asset for an investor: how the actual costs of money are calculated.

Why investors should understand the time value of their assets

Everyone who has ever made financial decisions has faced the dilemma: receive a sum today or take more money in a few months? At first glance, this seems like a simple choice. But in reality, the answer depends on how you understand the concept known in economics as the time value of money.

In practice, this means that if you have the opportunity to receive a certain amount right now, you can start investing it and earn a profit. If you decline this opportunity, you will lose not only potential income but also expose your assets to the effects of inflation. Therefore, the same number on paper will have a completely different real value depending on the time you receive it.

Fundamental Logic: The Opportunity Cost of Money

The main idea underlying the time value of money is the concept of opportunity cost. When you defer receiving money, you consciously forgo the opportunity to use it right now.

Let's consider a practical situation. Suppose you lent a friend 1000 dollars. Now the friend offers you two options: to return the money today, or to return the same amount in 12 months, since he is going on a year-long trip. At first glance, there seems to be no difference – both options are 1000 dollars.

But the time value of money leads us to another thought. Over these 12 months, you could place this money in a deposit with an attractive interest rate or invest it. Additionally, in a year inflation will inevitably reduce the purchasing power of your 1000 dollars. From all this arises a logical question: how much should your friend actually return to you after a year for the deal to be fair?

How to convert future amounts to present value

To systematically address this issue, economists have developed two interconnected concepts: present value and future value.

Current value allows you to assess how much the money you will receive later is actually worth when converted to the present moment. This is done using the market interest rate as a measure of discount.

Future value is the opposite calculation. You take a known amount in the present and determine how much it will be worth in the future, taking into account the accumulation of interest.

Both calculations are related by a single mathematical dependence but serve different purposes. Present value helps in deciding whether to accept a future cash offer or not. Future value is a planning tool: how much today’s invested money can bring back.

Practical calculations: from theory to numbers

Let's return to the example with a friend. Suppose you can invest money at an annual interest rate of 2%. What will be the future value of 1000 dollars in a year?

The calculation is quite simple:

• FV = 1000 $ × 1.02 = 1020 $

If the journey lasts two years:

• FV = 1000 $ × 1.02² = 1040.40 $

The general formula for calculating future value: FV = I × (1 + r)^n

Where:

• I – initial capital
• r – interest rate
• n – number of time periods

Now let's consider the reverse process. A friend says he will return in a year and give you back 1030 dollars instead of the initial 1000. Is this a profitable deal?

Calculating the current value:

• PV = 1030 $ ÷ 1.02 = 1009.80 $

This means that in today's equivalent, the friend's money is worth $1009.80 – more than you would receive now. In this case, waiting is justified.

Current value formula: PV = FV ÷ (1 + r)^n

Compound Interest: The Snowball Effect

So far, our calculations have assumed annual interest accrual once a year. However, banks and investment platforms often calculate interest more frequently – quarterly, monthly, or even daily. This significantly changes the final outcome.

If you add frequently accrued interest to the model, the formula changes: FV = PV × (1 + r/t)^(n×t)

Where t is the number of compounding periods per year.

Example: 1000 dollars at 2% annual interest with annual compounding:

• FV = 1000 $ × (1 + 0.02/1)^(1×1) = 1020 $

But if the interest is calculated four times a year:

• FV = 1000 $ × (1 + 0.02/4)^(1×4) = 1020.15 $

It is evident that the difference is only 15 cents. However, when it comes to large sums and long periods of time, this difference can turn out to be significant. This mechanism is often referred to as the magic of compound interest – money grows not linearly, but exponentially.

How Inflation Affects the Real Value of Assets

We have so far ignored the factor of inflation. But this is a critical flaw in the real world. If a bank offers you 2% per annum, and inflation is 3% per year, then in real terms, you are actually losing money.

Inflation is increasingly affecting wage and pension negotiations. However, measuring and predicting inflation is much more complicated than working with market interest rates. Different indices provide different figures, and predicting future inflation is almost impossible.

Therefore, when developing a long-term financial strategy, it is important to consider scenarios with different levels of inflation rather than relying on definitive forecasts.

The Value of Money Over Time in the World of Cryptocurrency

The concept of the time value of money is closely related to the investment choices made by anyone working with cryptocurrencies.

Let's consider staking. Suppose you have the question: should you keep your ETH in a hot wallet or lock them in staking for six months at 2% annual interest? The answer depends on whether you can find an alternative investment with a higher yield. By using simple calculations of the time value of money, you will be able to compare the offers and choose the optimal option.

A more abstract but relevant question: when to buy BTC? Although Bitcoin is often referred to as a deflationary currency, its supply actually gradually increases to a certain point, which means there is a current inflation level in the supply. Should I buy 50 dollars worth of BTC today or wait for the next paycheck and buy the same amount in a month?

According to the logic of the time value of money, the first option looks more attractive. However, the crypto market is significantly more volatile than traditional markets, so the real situation is more complex. The price fluctuations of BTC can far exceed the advantages of early entry.

Practical Application: How It Helps Crypto Investors

The formalized cost of money over time is actually used by large corporations, professional investors, and creditors on a daily basis. For them, even small percentage points have a significant impact on profitability.

But this concept is also useful for private individuals, especially for those who invest in cryptocurrencies. Understanding how the time factor affects the value of assets helps make more informed capital allocation decisions.

Simple calculations can provide a clear picture: what is the true value of the returns being offered to you, whether it is worth waiting, or if it is better to act immediately. Even intuitively, we often use this logic – we understand that money received today is worth more than the same money in the future.

Conclusion: the cost of time in the crypto economy

Although the value of money over time may seem like an abstract theory, it describes the patterns that are present in our daily economic life. Interest rates, asset yields, inflation – all of these are the results of this principle's action.

For crypto investors, understanding this concept is a practical tool that helps assess investment opportunities, compare different staking products, and make decisions about when to enter a position. Even if you do not explicitly use mathematical formulas, an intuitive understanding of the time value of money is what distinguishes successful investors from impulsive traders.