What is an Annual Percentage Yield (APY)?
Annual percentage yield (APY) is the interest rate, as a percentage number, that an investment earns by also taking compound interest into consideration. Compound interest is the earning that is added to the original investment balance regularly, which then also increases the total amount eligible for interest earnings.
Simply put, your earnings also generate returns due to compound interest.
APY is usually linked to classical finance and saving accounts. In crypto, APY also works on similar principles and is considered very important for crypto savings plans.
Difference between APY and APR
The annual percentage rate (APR) is the rate of interest earned in a specific period without any compound interest. APR is based on simple interest where returns do not get added to the primary amount. So key distinction is that APY considers compound interest while APR takes into account the simple interest.
It’s important to point out that Banks, crypto exchanges, and other financial institutes use APY and APR on the basis of the services they offer. Lending institutes usually offer APY, and borrowing institutes APR.What is APY, and how is it different from APR? What factors affect the rate of APY? Read this article to learn the answers to these questions. Click To Tweet
APY and Crypto
In crypto, you don’t receive APY in dollar value, instead, the interest rate is based on the value of the asset. For instance, if you were promised an APY of 2.5% upon depositing 1 ETH, you would receive 0.025 ETH as interest after a year. The value of ETH has no effect on the interest rate you get which makes crypto way more attractive than conventional finance.
By and large, stable coins on most crypto exchanges offer the highest APY returns that could get to as much as 15%. DeFI institutes such as liquidity pools can offer more but their rates don’t last long and drop very quickly. On the other hand, popular coins like BTC and ETH usually offer the lowest APY returns.
Factors Affecting Crypto APY
- Inflation – In crypto, inflation means the addition of more coins or tokens to the blockchain. Not all cryptocurrencies are designed like Bitcoin to have deflationary trends. The return rate in a network depends on the rate of inflation within that particular network.
- Compounding Duration – APY increments if the periods of compounding increase. Weekly or monthly compounding would give you more returns than annual compounding.
- Supply and Demand – Market dynamics also affect the crypto APY. If the demand to borrow grows, the interest rates also go up. Crypto liquidity is also affected by the demand and supply of that particular currency which in turn affects the APY.
All major crypto exchanges offer unique opportunities to earn returns on your investments. Read this article to learn more about the top 5 crypto exchanges.
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