CAGR tells you the smooth, steady, average yearly growth rate of something, assuming that any gains were reinvested and contributed to future growth. It's a much more realistic way to look at growth over time than just a simple average of yearly changes.

How…

Imagine you have a plant, and you want to know how much it grew on average each year over several years. But here's the tricky part: plants don't grow at the exact same rate every single year. Some years they might shoot up, other years they might grow slower.

CAGR (Compounding Annual Growth Rate) is like a special average growth rate that smooths out all those ups and downs to give you a single, steady percentage. It tells you what your plant's average yearly growth would have been if it had grown at the exact same rate every year, with that growth building on itself (compounding).

Here's the key idea:

Compounding: This is the magic part. It means that any growth from one year gets added to the original amount, and then the next year's growth is calculated on that new, larger amount. Think of it like earning interest on your interest.
Annual: This means "yearly." CAGR always gives you a yearly average.
Growth Rate: This is the percentage by which something increases.

How is it useful?

Let's say you invested some money, and you want to compare how well different investments performed over several years. Some investments might have had a super good year, then a bad year, then a so-so year. If you just took a simple average of those yearly growth rates, it wouldn't accurately reflect how your money actually grew because it wouldn't account for compounding.

CAGR solves this. It gives you a single, clear percentage that allows you to:

Compare investments: You can easily see which investment has had a better average annual growth over a specific period, even if their year-to-year performance was bumpy.
Understand long-term trends: It helps you cut through the short-term noise and see the overall growth trajectory of something, whether it's your investments, a company's sales, or even a country's economy.

https://www.dbm.academy/faq for more blockchain vocabulary.

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