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What is APY in Crypto and How to Calculate Your Interest

Why is APY in crypto higher than in traditional financial institutions? Read on to find out.

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If you’ve signed up for a savings account at a bank, you’ve probably seen the acronym APY (Annual Percentage Yield) on your investment. It shows how much you will make on your investment over 12 months unless you withdraw or transfer your funds earlier.

While a higher APY equals a higher yield on your investment, if the number is too high (like 200%), you may want to avoid these projects as they’re too risky for an investor looking for a sensible investment with stable returns. 

What you’ll learn about calculating crypto APY in this article:

  • What is APY
  • How to calculate APY
  • Why APY is higher for cryptocurrencies than banks
  • The difference between APY and APR

What is APY?

APY is your annual return on an investment that takes into account compound interest that is accrued on top of your initial investment. This means you’ll earn interest on the initial investment, as well as interest earned on that interest. 

And that’s how APY works in crypto savings plans and DeFi liquidity pools as well. For example, if you invest 1,000 USDT at 5% APY in a crypto interest account, you’ll earn 1050 USDT at the end of one year from the deposit date. 

Calculate Your Interest On Crypto With a Crypto APY Calculator 

The most straightforward way to calculate your yield based on APY is to multiply the value by your principal. 

If you want to break down your overall APY into specific time frames (e.g. one week), here’s an easy formula to calculate how much interest you’re earning every 30 days on a 5% APY 30-day plan, with an initial deposit of 1,000 USDT.

Interest = (Principal X APY / 365)  X Period

Interest = (1,000 X 0.05/365) X 30

Weekly interest ≈ 4.10 USDT

This means if you withdraw your funds after a week, you’ll only receive around 4.10 USDT in interest, as you wouldn’t enjoy the compounding effect of your interest being added to your balance. On the other hand, if you don’t withdraw your funds for a year, your interest will be added to your balance weekly and the interest paid on your updated will keep increasing over the course of the year. 

What Does 7-Day APY Mean in Crypto

In traditional banking, the interest is usually compounded once every month. Most crypto institutions offer shorter compounding periods, with 7-day being among the most popular ones. Those shorter periods are sometimes chosen for the following reasons:

  • The high volatility of cryptocurrencies may be too risky or undesirable for certain investors, and shorter compounding periods allow them to mitigate the effects of price swings
  • Investors can make sure that the annual percentage yield is indeed the same as the financial institution claims, and no manipulations take place
  • Shorter compounding periods are suitable for investors who are yet unsure whether to engage with crypto and wish to try this form of investment first

Other popular periods include 14 and 30 days. That said, APY is still calculated based on a yearly basis. 

Why Is the APY So High in Cryptocurrency vs Traditional Investments?

APY in traditional banks is considerably lower than that offered by crypto wealth management platforms. There are numerous reasons for that:

  1. APY at traditional banks or online banks is lower than in the crypto space. Bank savings accounts offer 0.28% on average as loans are issued at 2 to 3%. In crypto, especially cryptocurrency savings accounts, APY can reach 6%, as loans are issued at 5 to 8% on average.
  2. Fewer regulations and higher volatility drive APR in crypto upwards. The exact APR depends on the type of cryptocurrency and its capitalisation, and this, in turn, pushes the APY upwards.
  3. As a general rule, interest rates in crypto are dictated by many institutional players active in the area. Higher APR and APY come from bigger risks and bigger profits associated with the space. Cryptocurrency exchanges sustain this trend by offering loans at similar rates.
Comparison between APY in traditional banks and crypto
Table 1: Comparison between APY in traditional banks and crypto

What Can I Do If My Savings Platform Cuts My APY Earn Rates?

Recently, a savings platform cut their APY earn rates unexpectedly, almost by half in some instances, leaving crypto investors frustrated because their investments were now significantly less lucrative.

As an investor, let’s discuss your potential options.

If you’ve already locked up your crypto for a specific period, unfortunately you’ll have no choice but to wait it out. As part of your original investment strategy, you may also have staked a certain amount of the platform’s native tokens to improve your interest rate. 

To start, monitor the value of the platform’s native tokens to see if they’re worth holding even if you’re no longer on the platform. If the value doesn’t seem stable or it’s dropping, it might be time to drop those tokens from your investing strategy and look for a platform that offers yield without needing to endure the volatility of platform tokens. 

It’s also time to research on other savings platforms to look for one that better matches your needs. You can see some criteria to consider when choosing a crypto interest platform for your investments in the table below:

What is APR?

APR is the first thing a borrower wants to know. In most cases APR is the percentage on a loan product, i.e. the price one has to pay on a monthly basis in order to get the loan. It’s calculated as:

APR = Periodic Rate x Number of Periods in a Year

Banks usually feature APR for their credit products such as cards or mortgage loans. If you are a borrower, you would be interested in the lowest possible APR, which means that the loan is the least expensive.

What’s the Difference Between APY and APR?

Simply put, APY is about making money through lending, and in contrast, APR is about spending it through borrowing. 

If you’re on the lending side, whether through P2P or through investing in a savings account, you would be looking for the highest APY, as that means you’ll be earning the highest yield on your investment. However, your APY on deposit accounts may fluctuate with the market, so make sure you stay on top of any rate changes.

If you’re on the borrowing side, you’d be looking for the lowest APR, as that means you’ll be paying less interest on your loans. If your APR rate is fixed, it is unlikely to change. However, if you’ve signed up for a loan with an introductory APR, you’ll need to check how long it will last and what your rates will be once the introductory rate ends. 

APRs also reflects the simple interest rate over a year, while APY covers the compounding of interest, where you earn interest on your interest. 

Table 3: Comparison between APR and APY

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

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