Money

What is the time value of money (TVM)?

Understanding the time value of money is essential for making sound financial decisions and maximizing returns on investment.

Time value of money, explained

The time value of money (TVM) is the concept that money available today is worth more than the same amount of money in the future. While inflation gradually weakens the purchasing power of money, its worth can rise over time by being invested or earning interest.

The time value of money is an essential concept in finance and investing. Based on the interest rate and the time period involved, it is used to determine the present value of future cash flows, such as investment returns or loan repayments.

Related: What is opportunity cost? A definition and examples

Several financial calculations — such as future value, present value and annuities — can be used to show the TVM. Understanding the time value of money is crucial in making informed financial decisions, such as comparing investment options, deciding on loan terms and planning for retirement.

Annuities can be of two types: ordinary annuity and annuity due. In an ordinary annuity, the cash flows occur at the end of each period; while in an annuity due, the cash flows occur at the beginning of each period.

Does the time value of money concept apply to crypto?

The time value of money concept can also be applied in the world of cryptocurrency. In fact, it is an important principle to consider when evaluating the potential profitability of investing in cryptocurrencies.

Crypto lending platforms

The use of crypto lending platforms is one way that the time value of money principle is applied in the world of cryptocurrencies. These services enable users to earn interest on their investments by lending their cryptocurrency to other users.

The supply and demand of the cryptocurrency, the duration of the loan term, and the risk involved with the borrower are just a few of the variables that affect the interest rate that users can receive on their cryptocurrency investments. Due to the time value of money, the interest rate investors can earn on their investment increases with the length of the lending period.

Staking

Another application of the time value of money concept in crypto is through the use of staking. Staking entails keeping a specific quantity of cryptocurrency locked on a blockchain in order to benefit the network and sustain it. Staking incentives are typically driven by the length of time a user locks in their cryptocurrency, with longer staking periods leading to bigger rewards due to the time value of money.

Determine the potential future value of a cryptocurrency investment

Furthermore, the TVM concept can also be used to assess the potential future value of a cryptocurrency investment. The value of a cryptocurrency might change over time due to various variables, including market supply and demand, legislative changes and technological improvements, just like the value of any other investment.

Related: How to trade cryptocurrencies: A beginner’s guide to buy and sell digital currencies

The time value of money must be taken into account when estimating the possible future worth of a cryptocurrency investment, as the value of the investment will vary depending on how long it takes to reach its full potential.

Fiat is in ‘jeopardy’ but Bitcoin, stablecoins aren’t the answer either: Ray Dalio

The hedge fund manager instead wants to see an “inflation-linked coin” be brought to the masses which would serve to ensure consumers secure their buying power.

Billionaire investor Ray Dalio has described fiat currency as being in serious “jeopardy” as an effective store of wealth but doesn’t believe Bitcoin (BTC) and stablecoins will be the solution either.

The founder of hedge fund firm Bridgewater Associates explained on CNBC’s Squawk Box on Feb. 2 that the mass money printing of the United States dollar and other reserve currencies has him questioning whether they are forms of “effective money.”

“We are in a world in which money as we know it is in jeopardy. We are printing too much, and it’s not just the United States, it is all the reserve currencies.”

However, Dalio was quick to add his thoughts on whether Bitcoin was a potential solution, acknowledging that despite what it has accomplished in “12 years,” it is still too volatile to serve as money:

“It’s not going to be an effective money. It’s not an effective store holder of wealth. It’s not an effective medium of exchange,” he argued.

He also dismissed stablecoins as an effective form of money, as they are replica of state-backed fiat currency.

Instead, Dalio proposed the creation of an “inflation-linked coin” that would serve to ensure consumers secure their buying power.

“The closest thing to that is an inflation index bond, but if you created a coin that says OK this is buying power that I know I can save in and put my money in over a period of time and transact in anywhere, I think that would be a good coin,” he said.

“So I think you’re going to see the development of coins that you haven’t seen that probably will end up being attractive, viable coins. I don’t think Bitcoin is it,” he added.

However, not everyone agreed with Dalio’s take on Bitcoin and the viability of an inflation-linked coin.

Digital asset manager Eric Weiss of Bitcoin for Family Officers was one, telling his 38,300 Twitter followers that such a coin could not exist:

“According to Ray, [Bitcoin] is very close to being the solution to the world’s problems but it’s too volatile. He’s waiting for and vaguely describes a solution that doesn’t and can’t exist,” said Weiss.

ARK Invest CEO Cathie Wood also had a different view of Bitcoin, referring to it as a defense against wealth confiscation in parts of the developing world:

“Those populations need a fallback, an insurance policy like Bitcoin,” she said.

Related: Crypto-friendly Ray Dalio steps back from Bridgewater’s $150M fund

Dalio’s latest views on Bitcoin come despite once having labeled it “one hell of an invention” that could serve as a viable inflation hedge. However, these remarks were made on Jan. 28, 2021 — before the current bear market took effect.

The billionaire investor has also previously recommended BTC should make up 1-2% of an investors portfolio on Jan. 6, 2022.

As an investment product, the hedge fund manager said back in May 2021 that he would rather buy BTC over bonds but stated a few months later that he still prefers gold.

On Oct. 4, Dalio stepped down as Bridgewater’s co-chief investment officer, but he remained on board as a mentor.