Compounding, usually refers to the rise in value of an asset from interest earned on the initial principle down with accumulated interest over time. Resulting in a time & asset evaluation, also known as Compound Interest. While compound Interest increases the value of an asset more passively, On the opposite, a loan can cause a negative interest effect on a individual who decides to take a loan.

To explain how compounding provides incentive to holding long, lets say 1 BTC is held in a wallet that pays 5% interest annually. After the first year, the total balance in the wallet has gained up to 1.05 BTC, a reflection of 0.05 BTC in interest added to the 1 BTC principle, the wallet gains 5% growth on the original principal (1 BTC) and the 0.05 BTC of first year interest, resulting in a second year gain of 0.0525 BTC and a balance of 1.125 BTC after the first 2 years. As long as no withdrawals take place, and a steady 5% interest return remains. The wallet balance would grow to 1.625 BTC in 10 years, creating a steeper compound curve with time and value.