average yearly growth rate

What Is Compound Annual Growth Rate (CAGR)?

The Compound Annual Growth Rate (CAGR) represents the average annual rate at which an investment grows over a period of several years, assuming the gains are reinvested each year. It translates total growth into a smoothed, annualized return, making it easier to assess long-term performance. CAGR is based on the principle of compounding, where returns are continuously added to the principal to generate further returns—commonly known as “compound interest.”

In investing, annual results can be highly volatile, and simply comparing starting and ending values can lead to misleading conclusions. CAGR uses a consistent “annualized growth rate,” enabling fair comparisons across different assets or time frames. In Web3, CAGR is especially valuable for assessing long-term changes in token prices, protocol TVL (Total Value Locked), or user activity.

How Does CAGR Work?

CAGR operates on the principle of compounding: each year’s gains are added to the principal and generate further returns in subsequent years. CAGR expresses the total change over a given period as a constant annual growth rate—the rate at which an initial value would have to grow each year, with compounding, to reach the ending value.

For example, if an asset increases from 100 to 172.8 over three years, and if this growth happened at a steady annual rate, that rate would be the CAGR. This approach avoids being misled by outlier years and provides a more accurate sense of long-term performance.

How Do You Calculate CAGR?

CAGR is typically calculated using this formula: (End Value / Start Value)^(1/Number of Years) − 1.

Step 1: Determine the starting and ending values—such as initial price or TVL.

Step 2: Calculate the number of years (n), converting months or days into years if necessary (e.g., 36 months = 3 years).

Step 3: Apply the formula to find CAGR. For example, if the start value is 100, the end value is 172.8 over three years: (172.8/100)^(1/3)−1 = 20%, meaning an effective annual growth rate of 20%.

In spreadsheet tools, you can use the POWER function: POWER(End Value / Start Value, 1/Years) − 1. The result is the CAGR.

What Are the Use Cases of CAGR in Web3?

CAGR is primarily used in Web3 for evaluating long-term trends and cross-project comparisons. It answers questions like “How has this asset performed over several years?” instead of focusing on short-term spikes.

For token price analysis, CAGR smooths out volatility and enables better comparability between different cryptocurrencies. At the protocol level, TVL’s CAGR can indicate capital stickiness and ecosystem growth. For user metrics, CAGR of active addresses or transaction counts reflects adoption trends.

Practically, you can select a token on Gate’s market page, retrieve the price from three years ago and the current price, then use the formula to calculate CAGR for benchmarking against similar tokens or indices.

What Is the Difference Between CAGR and Arithmetic Average Growth Rate?

CAGR is a “compounded annual rate,” while arithmetic average growth simply adds up annual changes and divides by the number of years, ignoring compounding effects.

For example: Year 1 +100%, Year 2 −50%. Arithmetic average is (100% − 50%)/2 = 25%, but starting at 100, going up to 200, then dropping back to 100 means no overall growth—CAGR in this case is close to zero, which reflects reality more accurately.

Therefore, for multi-period performance comparison, CAGR is more reliable. Arithmetic averages are better suited for describing “typical annual changes” but not for assessing long-term compounded returns.

How Is CAGR Used in Investment Decisions?

When comparing assets, CAGR helps identify those with more stable long-term returns—especially useful in volatile crypto markets. Comparing the CAGR of various tokens or strategies over the same period provides more insight than just looking at single-year gains.

For goal-setting, you can use CAGR to reverse-calculate the growth rate needed to achieve a target. For example, if you want your asset to grow from 100 to 200 in three years, you’d need an annualized growth rate of about 26%.

On platforms like Gate, you can use CAGR alongside DeFi or staking yields for long-term planning. If you expect a token’s price CAGR to be X% and DeFi yields Y%, you can combine these figures (while considering frequency and risk) for scenario analysis. Remember: crypto asset volatility and platform rules affect actual outcomes.

Common Pitfalls and Risks of Using CAGR

1. Ignoring Time Frames: Calculating CAGR from bull market start to end yields optimistic results; different intervals can produce very different rates.
2. Overlooking Cash Flows: CAGR only considers starting and ending values—it doesn’t account for multiple buys/sells or cash in/out during the period. In such cases, use a return metric that incorporates cash flows.
3. Ignoring Fees and Slippage: Trading fees, funding rates, and slippage reduce actual returns, causing discrepancies between calculated CAGR and real outcomes.
4. Being Misled by Outliers: Extreme volatility in a single year can skew ending values—and thus CAGR—so it’s best analyzed alongside metrics like median returns or drawdowns.

Important note on asset safety: Crypto prices are highly volatile; past CAGR does not guarantee future performance. When using leverage or participating in high-yield products, always assess liquidity, liquidation risk, and compliance considerations.

Practical Steps and Tools for Calculating CAGR

Step 1: Choose your asset and time frame—select a token or index on Gate’s market page with clear start and end dates.

Step 2: Record start and end values—these can be price, TVL, or activity metrics but must use consistent units.

Step 3: Convert to years—calculate using days or months as needed (e.g., 24 months = 2 years).

Step 4: Apply the formula—(End Value / Start Value)^(1/Years) − 1; in Excel or Google Sheets use POWER(End Value / Start Value, 1/Years) − 1.

Step 5: Compare and interpret—place your result alongside similar assets’ CAGRs and analyze it together with volatility, drawdowns, and trading costs.

If your investment involved multiple trades or cash flows, consider using return methods designed for irregular cash flows for greater accuracy.

How Should You Interpret CAGR During Bull and Bear Markets?

During bull markets, CAGR tends to appear higher; during bear markets, it may be negative. Because results are highly sensitive to selected time frames, CAGR is best used for full-cycle or multi-cycle comparisons.

A practical approach is segmented calculation: compute CAGRs separately for bull and bear periods, then review the overall cycle’s CAGR. This helps identify whether long-term gains rely heavily on specific market phases and prevents overly optimistic interpretations.

Key Takeaways About CAGR

CAGR uses compound growth logic to convert multi-year changes into an equivalent annualized rate for easier comparison and planning. Calculation is straightforward: determine your start value, end value, time period in years, then apply the formula. In Web3 contexts, it offers a reliable way to assess long-term trends in token prices, TVL, or user activity—but beware of biases from time windows, cash flows, fees, or volatility. Combine CAGR with risk metrics and segment analysis on platforms like Gate for more realistic long-term assessments.

FAQ

What’s the difference between CAGR and Year-over-Year (YoY) Growth Rate?

CAGR represents average annualized growth over multiple years—reflecting long-term trends—while YoY only compares growth from one year to the next and highlights short-term fluctuations. Think of CAGR as your average salary raise per year over five years; YoY just tells you how much your salary changed this year versus last year. For evaluating project longevity or value accrual, CAGR offers a more reliable metric.

What does a negative CAGR indicate?

A negative CAGR signals an overall downward trend during the selected period. For instance, if a crypto asset falls from $100 in 2021 to $20 in 2023—even with brief recoveries—the negative CAGR reflects sustained decline. In such cases, analyze underlying causes before considering new investments; don’t assume declines are always cyclical lows.

Why does CAGR sometimes look high even when a project is declining?

This often happens due to base effects. If a token rises from $0.01 to $0.10—a tenfold gain—CAGR exceeds 100%, but since its absolute value remains small, a drop back to $0.05 is also possible. Always consider absolute values and volatility alongside percentage CAGRs; high percentages alone can be misleading if not sustainable.

How can you apply CAGR to Dollar-Cost Averaging (DCA) strategies in crypto?

CAGR helps evaluate whether an asset has delivered strong long-term returns suitable for DCA. If an asset’s five-year CAGR is 20%, it suggests solid historical performance—possibly supporting continued DCA contributions; conversely, a negative figure warrants caution. However, past results don’t guarantee future returns—especially in volatile crypto markets—so always assess fundamentals and personal risk tolerance before investing.

How can beginners quickly understand the concept of CAGR?

Think of CAGR as a “smoothed growth rate.” Imagine driving 500 kilometers over five hours; regardless of speed fluctuations along the way, your average speed is 100 km/h. Similarly, if an asset grows from 100 to 300 over five years, its CAGR is about 24.6% per year—providing a clear gauge of how fast it grew on average.