When it comes to interest rates in cryptocurrency, there are two main types: Annual Percentage Return (APY) and Annual Percentage Rate (APR). Both measure the amount of interest earned on an investment over a 12-month period, but APY is calculated using compound interest, while APR does not.
APY vs APR
So in most cases, APY will be higher than APR. For example, if you invest $1,000 at an APY of 2%, you will earn $20 in interest over the course of a year. If the investment had a 2% APR, you would only earn $16.67 in interest because APR doesn’t account for compound interest.
When it comes to crypto, APY is often used to measure the interest earned on a crypto asset held on a lending platform. For example, if you deposit 1 BTC on a lending platform that offers an APY of 10%, you will earn 10% on your 1 BTC deposit over the course of a year.
However, it is important to note that APY can fluctuate based on the market. For example, if the price of BTC increases during the year, the value of your 1 BTC deposit will also increase. This means that the interest on your USD deposit will be worth more.
On the other hand, if the price of BTC falls, the interest on your deposit will be worth less in USD. That is why it is important to consider the market when comparing APY rates. To calculate APY, you need to divide the interest by the number of days in the year. Then multiply that number by the number of days you hold the investment.
If you’re into DeFi (or any other type of investing), it’s worth learning the difference between APY and APR.
Which is more accurate? APY or APR?
In general, APY is a more accurate measure of the interest earned on a crypto investment over a 12-month period. However, APR may still be helpful in some cases. For example, APR can be used to compare the interest rates of different investments.
If you want to earn interest on your crypto, it is important to compare the APY rates between different lending platforms. This will help you find the platform that offers the best return on your investment.
While the APY on a cryptocurrency investment may be higher than what you would earn on a traditional investment, it is important to remember that there is also more risk involved. Cryptocurrencies are still a relatively new and volatile asset class, and as such their prices can fluctuate wildly. Before investing in any cryptocurrency, do your research and understand the risks.