APR vs. APY: What Is the Difference?

As a crypto investor, you will face several terms and abbreviations related to your assets, and two of them - APY and APR - are widely used in every platform with crypto products.
APY (Annual Percentage Yield) refers to the amount of interest earned on your savings and APR is how much interest you owe. APR, which stands for Annual Percentage Rate, is the interest rate on an account plus any fees you will have to pay.

What Is APR (Annual Percentage Rate)?

The monetary value or reward that investors can earn by making their crypto tokens affordable for borrowing, taking into account interest rates and any other fees borrowers must pay, is called the Annual Percentage Rate (APR). Currently, users holding cryptocurrencies are encouraged to deposit them on various platforms that offer them a high Annual Percentage Rate (APR).

How Does APR Work?

An annual percentage rate is expressed as an interest rate. It calculates the percentage of principal you will pay each year, taking into account things like monthly payments. APR is also the annual interest rate paid on investments without accounting for the compounding of interest in that year.

How to Calculate APR?

The APR is calculated by multiplying the periodic interest rate by the number of periods in a year in which it was applied. It does not indicate how many times the fee is actually applied to the balance.

What Is APY (Annual Percentage Yield)?

APY is the annual rate of return on investment, which takes into account compound interest, which accrues or increases with the balance sheet. Compound interest includes interest earned on the initial deposit plus interest accrued on that interest.

While APY is commonly associated with traditional economics, it is an important metric for crypto-saving programs and works in a similar way. Crypto investors can earn APY on cryptocurrencies by betting on them, placing them in savings accounts, or providing liquidity to liquidity pools through profitability.

You can start earning APY quickly on your cryptocurrencies through cryptocurrency exchanges, wallets and DeFi

Decentralized Finance (DeFi) takes the concept of decentralized blockchain and applies it to the world of finance.

Typically, investors receive interest in the same cryptocurrency in which they deposited the funds. However, there are times when they may receive payments in the same or a different currency.

How Does APY Work?

Users can generate compound interest on their cryptocurrencies by various means such as betting on them and providing liquidity to liquidity pools on exchange platforms. These activities of interest can be found on cryptocurrency exchanges, blockchain and DeFi protocols, and even cryptocurrency wallets.

Cryptocurrency Investments that Count in APY:

• Yield Farming: You can lend your cryptocurrency to the liquidity pools of various platforms to earn more cryptocurrencies as a reward. This movement is called cash farming. A popular strategy among seasoned income farmers for better APY is to move your cryptocurrencies across different platforms - all to get the highest yield possible.

• Crypto Staking: Proof-of-stake blockchain networks such as Ethereum 2.0 allow you to stake your cryptocurrency and earn rewards by validating transactions on the blockchain. Staking means locking your cryptocurrency for a specified period of time; this way you participate in the security of the network and also earn more cryptocurrencies.

How to Calculate APY?

The APY for a cryptocurrency investment can be determined with a specific formula that takes into account the nominal interest rate values as well as the number of compounding periods. The nominal interest rate is the interest rate before considering inflation.

N = the number of compounding periods

Most crypto projects offer an APY of more than 1%, and APY rates across platforms may differ. For example, if you plan to farm, you can switch between different platforms in search of a better APY and maximize your earnings. It should be noted that most of the high APY offers on cryptocurrency investments come from income farming.

Differences Between APR and APY

Both APR and APY are used as measurements of interest, but APR focuses on the amount of interest that the borrower has to pay while APY calculates the interest paid to a borrower.

When assessing APR, the smaller the percentage, the lower the cost of borrowing money through a personal loan or mortgage. On the other hand, a higher APY means that you’ll earn more from that type of financial investment, such as a deposit account or certificate of deposit.

Conclusion

APR investors should keep in mind that Bitcoin and other cryptocurrencies are extremely volatile. As a result, the amount of interest you earn may vary. Cryptocurrency lending programs are attractive to investors who want to hold their coins for the long term, so passive income will add value to your portfolio. However, any change in the price of the cryptocurrency would have an impact on its revenue. Investors participating in fixed lending programs can expect fluctuations in the value of their portfolio as they will not be able to trade locked currencies for a specific period of time.

APY is one of the most essential metrics to consider when comparing investment opportunities and calculating what kind of profit you can make. The higher the APY of a particular crypto investment, the higher your earnings.