What is APY and How To Calculate It

Earning interest on your digital assets is a popular way to grow crypto holdings. This concept is often associated with the metric called APY.

So what is APY and how is it applied in crypto? This guide will explain what APY truly means in the context of cryptocurrency and how to calculate it.

What Is APY?

APY is a term that is not specific to cryptocurrency. It comes from the traditional finance field and denotes the full interest that can be gained in a year on an investment account.

It takes compounding into consideration and gives a more accurate representation of your real profits compared to interest rates. Compounding adds the interest you earn to your principal balance, and future interest computations are based on the larger amount. The higher the frequency of compounding, the bigger the influence on your assets.

APY is crucial for crypto holders who wish to estimate possible earnings from their investments. Let's discover its meaning and how to compute it.

What Is APY In Crypto?

APY stands for annual percentage yield. In crypto, APY is the annualized return you might expect on your cryptocurrency holdings through various investment methods.

There are various methods to generate interest on your tokens, with popular options being:

• Staking: Staking involves keeping your tokens locked for a set period to support the network’s operations. In return, you get extra tokens.
• Lending: You may lend your tokens to be utilized for various purposes while receiving a percentage of the earned interest.
• Liquidity Pools: This method allows you to provide liquidity to trading pairs within the liquidity pool and earn fees as rewards.

Keep in mind that crypto APY is extremely volatile and might change according to market conditions, specific platforms, and chosen currency. All interest-earning methods also come with distinct APY rates.

How To Calculate APY?

The APY is calculated using a specific formula:

(1 + (nominal interest rate / compounding frequency))^compounding frequency - 1

Here’s what each variable represents:

• Nominal Interest Rate: The offered interest rate.
• Compounding Frequency: The number of times interest is compounded per year.

The formula might seem intricate, but it is actually fairly easy. Imagine you’re staking a crypto asset with a nominal interest rate of 10% compounded daily. All you need to do is put those values into the formula:

APY = (1 + (10% / 365))^365 - 1

Therefore, you’ve estimated that the APY is approximately 10.47%. This means that the effective yearly return will be around 10.47%, despite the nominal interest rate being 10%.

Of course, you don’t have to count it yourself. Many online services perform APY calculations for you. Such calculators often involve additional factors like platform fees or variable interest rates. Herewith, you should always refer to a specific platform’s documentation for accurate figures.

APY VS. APR

When you deal with crypto investments, you usually come across two key terms: APY and APR. Although both allow you to count compensations, they are calculated differently and lead to various outcomes. Understanding the difference between these two will help you estimate potential returns better.

While APY considers compounding, APR (Annual Percentage Rate) is a simpler metric that only reflects the base interest rate offered on an account without factoring compounding. APY is commonly utilized for long-term investing, while APR is used for short-term investments or loans.

Generally, APY will be slightly higher than APR, particularly in accounts with frequent compounding. So, focusing solely on APR might lead to underestimating your actual earnings potential. However, if the compounding frequency is low, the actual returns may be much lower.

One more vital difference is that, still, not all cryptocurrency platforms showcase APY, so you may have to search for it or calculate it yourself. APR is typically more easily available.

That was everything you should know about APY in crypto. And if you ever need to calculate it, you can easily do it with the formula or use one of the online calculators.

We hope this article was helpful! Ask your questions and leave the comments below!