The Time Value of Money: How to Make Better Financial Decisions

In the world of investments, especially in cryptocurrencies, we are constantly faced with temporary money decisions. Should I buy out now or wait? Is locked staking worth it? The economic concept that answers these questions has a formal name, but the truth is that you are probably already applying it without knowing.

Money Today Is Worth More Than Money Tomorrow

Imagine you lent 1,000 USD to a friend some time ago. Now they contact you to pay it back. The offer is simple: 1,000 USD today if you go to pick it up, or the same 1,000 USD in 12 months with no effort. Although it seems the same, it is not.

If you receive the money today, during those 12 months you could deposit it in a fixed term, invest it in bonds, or even buy it in cryptocurrencies. Those profit opportunities that you lose by waiting have a real cost. Additionally, inflation would cause your purchasing power to decrease. In terms of real money values, waiting 12 months would leave you with less effective wealth.

So, how much should your friend pay you in 12 months for the wait to be worth it? At a minimum, they would have to compensate you for the return you would have earned during those 12 months.

Breaking Down the Concept: Present Value and Future Value

To formally analyze the values of money at different points in time, experts use two complementary calculations:

Future Value (FV): Take the money you have today and imagine how much it will be worth after a certain time with a specific return. It is the question: if I invest X today, how much will I have tomorrow?

Present Value (PV): It is the opposite. If someone promises to give you an amount in the future, what is its value in today's money?

For example: your friend says that in a year he will pay you 1,030 USD instead of 1,000 USD today. To know if it's a good deal, you calculate how much those future 1,030 USD are worth in current money ( assuming a 2% annual return you could get elsewhere ).

How to Calculate These Values

The calculation of the future value is straightforward. If you invest $1,000 at an annual rate of 2% for one year:

FV = $1,000 × 1.02 = $1,020

Two years would be: FV = $1,000 × (1.02)² = $1,040.40

The general formula is: FV = I × (1 + r)ⁿ

Where I is your initial investment, r is the rate of return, and n is the number of periods.

To find the present value, you invest the formula. If you want to know the current value of 1,030 USD that you will receive in one year ( with that 2% return available elsewhere ):

PV = $1,030 ÷ 1.02 = $1,009.80

Your friend would be offering you about $9.80 more than what you would get today, so waiting would be profitable.

The general formula is: PV = FV ÷ (1 + r)ⁿ

The Compounding Interest Amplification Effect

When interests are capitalized ( that is, you earn interest on the interest you have already earned ), growth accelerates. It starts slowly, but over the years the effect is exponential.

If your 2% yield is compounded quarterly instead of annually, the formula adjusts as follows:

FV = PV × (1 + r/t)ⁿˣᵗ

Where t is the number of compounding periods per year.

In our example of $1,000:

• Annual capitalization: $1,020
• Quarterly capitalization: $1,020.15

Fifteen cents may seem insignificant, but with large amounts and long periods, the difference becomes considerable.

Inflation: The Silent Enemy

So far we have used simple yield rates. But what happens when inflation is 3% per year and your yield is only 2%? In real terms, you are losing purchasing power.

Inflation is complicated to measure because there are multiple indexes that produce different figures, and it is extremely difficult to predict. However, including it in the calculations of money values is essential for serious financial decisions. In times of high inflation ( as we have seen in recent years ), positive yields that seem good may be insufficient.

Practical Application in Cryptocurrencies

The concept of the time value of money is particularly relevant in the crypto ecosystem, where you constantly choose between temporary options.

Blocked staking: Many platforms allow you to lock tokens like ETH for a fixed period (let's say 6 months) in exchange for a yield of 2% (or higher). Is it worth it? Compare the future value of your tokens with what you could achieve in other investment opportunities.

Timing of buying in Bitcoin: Although BTC is conceptually considered deflationary, its current supply remains inflationary (increases slowly). If you have $50 to invest monthly, should you do it all now or wait? The concept of money values suggests buying now because every month you wait loses opportunity for profitability.

But the crypto reality is more complex: price volatility can nullify these traditional calculations. The concept remains useful, but requires adjustments for volatile markets.

Conclusion

Whether you consciously use these formulas or not, the time value of money is present in every financial decision. Multinational corporations, lenders, and large investors rely on these calculations because even differences of percentage cents significantly impact their profits.

For cryptocurrency investors, understanding how money changes in value over the time available to invest is fundamental. Whether choosing between staking opportunities, deciding when to enter the market, or evaluating lenders, these concepts allow you to make more informed decisions about where to place your capital to maximize returns.