Decentralized Finance Projects have been able to offer a huge opportunity for cryptocurrency investors to grow their wealth passively. The beauty of it is that one can withdraw his earnings daily or compound them to earn more rewards.
Most people who believe in the future of a project prefer to compound their rewards for two reasons; to earn more rewards and to have a good bag for the bull season.
Now, there is something most cryptocurrency investors, especially DeFi users, do not consider. Your $1000 on a pool is virtual money that can be converted to fiat or blown away by the wind. The exchanges where you farm with your tokens promise and pay rewards to you as a way of compensating you for investing with them. The reward you are paid is said to come from transaction fees, block rewards, and perhaps from a pool, but have you asked yourself what the exchanges do with their profit?.
To keep you compounding your reward, they will give you a huge APR which blows your mind and makes you keep compounding your rewards. This makes it easier for them to dump on you without affecting the market much.
The exchange or POS project does not always make huge profits all the time. There are some days when transactions will be low, which translates to a low reward for the project, but because they have their APR visible to all, they will pay participants their deserved reward.
This gives participants the confidence to keep compounding their reward to earn more. The project will surely take profit to take care of both personal gains and for the development of the project. There can't be other ways to do this than leveraging the continuous investment of investors in catching out on them. When investors start to take out profits, they will increase the APR just to reduce the number of those taking out profits, because there won't be enough liquidity and rewards to take care of the mass withdrawal. This way, the project or exchange continues to enjoy a smooth operation from the actions of those who are compounding more than withdrawing.
By this, I do not mean that operations of POS projects and exchanges are not to be trusted but that as investors, we shouldn't be carried away by the rewards we earn and thus continue to reinvest without taking out profits. In every reward you earn, it is ideal that you take away ⅔ of the reward and re-invest the remaining part. This is beneficial in many ways.
The first is that you won't be affected much tomorrow if the project pulls out or has a challenge that makes their tokens dip very low. If you are with Juno swap and perhaps you invested in their token, Juno, you will agree with me that your daily rewards as of last month are far bigger than what you earn today, and if you have been compounding all your rewards, you will certainly agree with me that you are at a loss if you decide to take out profit now. The token will still rise though but you could have taken out more profit before now if you have not been compounding 100%, and you could have also bought more now with some of those profits.
The second is that it is always good to take out profits from online investment and put them offline because online investment can turn sour tomorrow, so you will have something else to fall back to.
This is not financial advice though, but a practice that I deem worth sharing. Stay safe, have an investment strategy and you will survive very well online. Please do your research.