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What Is APY in Crypto

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

Wherever you come across a savings account at a bank or any investment proposal, they quote APY for your investment. The acronym stands for “annual percentage yield”. It shows how much you will make on your investment over 12 months unless you withdraw or transfer your funds earlier.

This information is usually crucial for making financial decisions. Banks in certain jurisdictions are legally obliged to disclose it to you if you set up a savings deposit with them. In traditional finance, APY is usually low and is kept at one or two per cent a year at best. In crypto, APY is generally higher and varies from 2 to 12% in the case of safer bets. In the case of extremely risky DeFi projects that are only regulated by smart contracts, APY can go up to 200% or even more. However, these types of risky projects are not recommended options for those looking for a sensible investment. 

Calculate APY Crypto

Crypto Interest Rates: APY and APR

There are two fundamental ways to measure interest that cover different sides of the investment:

  • APY (annual percentage yield)
  • APR (annual percentage rate)

APY is a way to estimate the profitability of an investment. It assumes that you get profits on your investment over a specified period, which can be a week or a month. If you then add the profits back to the original investment, the amount subject to interest becomes higher and, therefore, more profits. APY shows the percentage of how much you can make in 12 months this way relative to your original investment.

The periods mentioned above vary across the platforms that offer such options. While a yield farming platform offers terms and conditions much different to those proposed by a bank, APY still gives you the most accurate picture of your earnings and the actual yield. 

APR, while also a metric of interest, is somewhat similar to APY but is used to measure something completely different. 

What’s the Difference Between APY and APR?

Unlike APY, which is the focus of an investor’s interest, APR is the first thing a borrower wants to know. In most cases APR is the percentage on some loan product, i.e. the price one has to pay on a monthly basis in order to get the loan. In other words, APY tells you how much you will make, while APR tells how much it will cost to loan the same amount of money from you. Simply put, APY is about making money, and in contrast, APR is about spending it. 

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. On the other hand, if you are the lender (and if you open a savings account, you become one), you would be interested in making your loan more expensive to yield more profits, and therefore seek a higher APY. 

Table 1. Comparison between APR and APY
Table 1. Comparison between APR and APY

Calculate Your Interest On Crypto With a Crypto APY Calculator 

In order to calculate your APY, you use a simple formula. But before proceeding with it, you should know a few values:

  • Your nominal interest rate or annual interest rate, i.e. the one that applies to the deposited amount. This rate is, in fact, APR, i.e. the rate at which your funds are loaned to borrowers. In the formula, R stands for the interest rate.
  • The number of compounding periods per year, which is sometimes called the periodic rate. A compounding period is a period at which the interest is accrued. This value is usually determined by the contract between the bank/crypto institution and yourself. In the formula, N stands for it.

The formula itself looks as follows:

APY = (1+R/N)N-1

Thus, if the crypto institution loans your funds at a 12% APR and you get the interest once every month and then add it to your deposit, your APY will be (1+12/12)12-1 = 1.0112-1 = 0.1268, or 12.68%.

You could make this calculation semi-automatic by using Excel, Numbers, Google Sheets or other software for spreadsheets:

  1. Choose any cell and type “R”, then “N” in the one to the right, and then “APY” in the one to the right of “N”.
  2. Below R and N, type in the nominal interest rate (in percentage terms) and the yearly number of compounding periods respectively.
  3. On the APY cell, click the “equals” sign.
  4. Enter the formula, which in spreadsheet tongue would look like this: =(1+cell name for R/cell name for N)^cell name for N-1, then press enter.
  5. Enjoy the results. If necessary, change the values to make a different calculation.

What Does 7-Day APY Mean in Crypto

In traditional banking, the interest is usually compounded once every month. Some traditional financial institutions and 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 year. The formula, however, is different:

A = ((E-B-F)/B)*365/X,

where A stands for the resulting yield, E for the final deposit sum, B for the initial one, F for applicable fees, and X for the number of days for which the yield is calculated. 

At Cabital, you can earn steady passive income of up to 12% APY on USDT without limitations on the duration period of your deposit.

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 such as Cabital. There are numerous reasons for that:

  1. APR 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, loans are issued at 5 to 18% 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.
  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.
Table 2. Comparison between APY in traditional banks and crypto
Table 2. Comparison between APY in traditional banks and crypto

How Does Cabital Ensure the APY on My Crypto Investment?

If you're looking to diversify your crypto investments to include savings accounts to generate interest from your crypto holdings, it's time to try Cabital!

Cabital enforces strict internal policies to ensure the highest possible APY for our customers. 

  1. We never deal with risky assets and have three-layer checkups in place
  2. We mitigate volatility effects through careful choice of investment options
  3. We work only with the over-collateralised lending platforms when lending assets
  4. Cabital has built yield curves for each of the offered cryptocurrencies, including USDT, which offers APY of up to 12%
  5. Users can track their assets 24/7 on the app

Cabital’s prime policy is to link the customer’s deposit to the final APY without exposing them to unnecessary risks. Our security measures include post-investment management as part of regular operations to ensure that the funds are evacuated immediately if anything goes wrong. In addition to that, we use cutting edge protection against cyberattacks and insurance covering the stored assets. 

Are you new to crypto and wish to try it out with small amounts or short compounding periods? Are you a seasoned investor seeking to diversify the traditional portfolio with the cream of crypto assets? In both cases, Cabital is here for you! We offer industry-leading services that come with regulatory approval in the EU. You can also easily buy cryptocurrency with SEPA, Plaid, or Faster Payments with Cabital.

Get started with Cabital now!

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.

This article does not contain all the information that is or may be material to you and should not be considered as advice or a recommendation to you in respect of the holding, purchasing or selling of digital assets and does not take into account your particular objectives, financial situation or needs. This article has been made to you solely for information purposes. This presentation may be amended and supplemented as the Company sees fit, may not be relied upon for the purpose of entering into any transaction and should not be construed as, nor be relied on in connection with, any offer or invitation to purchase or subscribe for, underwrite or otherwise acquire, hold or dispose of any digital assets, and shall not be regarded as a recommendation in relation to any such transaction whatsoever. The contents of this presentation should not be considered to be legal, tax, investment or other advice, and you  should consult with your own counsel and advisers as to all legal, tax, regulatory, financial and related matters concerning an investment in or a disposal of such digital assets and as to their suitability for you.

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