What Is APY In Crypto?
According to Bankrate, the average interest rate on US bank deposits is 0.06%. With rates on traditional deposits reaching a high, it is not surprising that crypto savings accounts, staking, yield farming, and crypto lending are attracting significant attention. After all, who wouldn’t want to earn passive income?
Annual Percentage Yield (APY) is a general term used in traditional finance and crypto to explain how much you can earn from your assets. The main difference is usually whether your income is summed up, i.e., whether your income brings profit and for what period. APY is a key metric for a crypto investor that helps compare returns between platforms or assets.
In this article, we will talk about APY, a new important term to know, how it works for cryptocurrencies, APR, and much more. So let’s get started!
What Is APY in Crypto?
APY is the annual rate of return on investment, considering the compound interest that accumulates or grows with the balance sheet. Compound interest includes the interest earned on the original deposit plus the interest earned on that interest.
While APY is commonly associated with traditional savings, it is an important metric for cryptocurrency savings programs. Crypto investors can earn APY on cryptocurrencies by staking, placing them in savings accounts, or providing liquidity to liquidity pools through yield farming.
You can start earning APY fast with crypto exchanges, wallets, and DeFi. Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance.
Importance of APY for Investors
APY is a crucial indicator of how much money an investor can earn when they invest their money. APY helps to account for compounding interest, and it gives a better sense of how much an investor will earn in interest based on the account balance.
Calculating APY makes it more straightforward to quantify how much crypto investors may stand to make by way of interest. Doing so can help better plan for their account balances on a recurring basis. Furthermore, it also means investors can keep an eye on how compounding interest helps them grow their money without requiring work on their part to do so.
What Does 7-Day APY Mean in Crypto?
The 7-day APY rate is the annual rate of return using 7-day returns. It is calculated by taking the net difference in price seven days ago and today and getting the annual percentage.
The formula for calculating the 7-day APY rate is as follows:
APY = (X − Y − Z) ÷ Y × 365/7
X = price at the end of the 7-day period
Y = price at the beginning of the 7-day period
Z = any commissions per week
This calculated amount helps investors understand weekly returns.
How to Calculate APY?
APY can be calculated using a particular formula. This formula is commonly used in traditional finance, where nominal interest rates are basically the same over a long period. It includes the nominal interest rate and the number of compound interest periods. The definitions of these two quantities are as follows:
- The nominal interest rate is the interest rate before inflation.
- The compound interest period is the period between the last interest accrual and when it will accrue again. For example, monthly compound interest means that interest will accrue every month. The period can be monthly, daily, yearly, or any other.
The formula for calculating the annual return is as follows:
APY in the world of cryptocurrencies is constantly changing. As a result, the APYs indicated on crypto exchanges, liquidity pools, and staking pools are often only approximate. Volatility arises from changes in supply and demand for specific crypto assets. If demand for a particular crypto asset goes up, the interest rate and APY will usually go up as well.
What Is APR in Crypto?
The monetary value or reward investors can receive by making their crypto tokens available for loans (taking into account the interest rates and any other fees borrowers have to pay) is called the Annual Interest Rate (APR). It is usually the first thing borrowers want to know. Several platforms encourage users to deposit their crypto assets by offering them a high APR. The annual interest rate does not include compound interest.
Some cryptocurrency exchanges do not allow you to lend your coin. However, those exchanges that do so offer different rates. These interest rates fluctuate depending on the type of loan or currency you provide.
APR vs. APY
If you are lending through P2P or investing in a savings account, looking for the highest APY is essential, as this means you will earn the highest return on your investment. However, the APY on deposit accounts can fluctuate depending on the market, so you should keep an eye out for any rate changes.
If you want to borrow, you need to look for the lowest APR. This means that you will pay less interest on the loan. If the interest rate is fixed, it is unlikely to change. But if you have signed up for a loan with an initial Annual Percentage Rate, you need to check how long it will last and what your rates will be after the initial rate ends.
Furthermore, APR reflects the simple interest rate over a year, and APY covers the compounding of interest, where you earn interest on your interest.
Why is APY so High in Crypto?
APY for a particular crypto project depends on the supply and demand for the assets of that crypto project. High demand leads to high APY. Most fairly high APY offerings come from yield farming or liquidity mining. Users provide their funds to liquidity pools and lend their tokens to users to earn income and rewards.
Projects with incredibly high APYs above 100% often try to offset the temporary losses that occur when the ratio of tokens in a particular pool is unbalanced. High APY is typical for new crypto projects launched on decentralized exchanges (DEXs).
Every investor needs a method to compare investment opportunities and calculate profits. APY, or Annualized Percentage Yield, is the standard rate of return calculation used in traditional finance as well as cryptocurrencies. It includes the effect of compound interest, which can increase the amount earned. The higher the APY, the more money investors earn. Comparing APY options can help identify the most attractive investment opportunities, which is extremely important in the crypto world.
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Disclaimer. This material should not be construed as a basis for making investment decisions or as a recommendation to participate in investment transactions. Trading digital assets may involve significant risks and can result in the loss of invested capital. Therefore, you must ensure that you fully understand the risk involved, consider your level of experience, investment objectives, and seek independent financial advice if necessary.