Cryptocurrencies have become a hot topic in recent years. With their popularity on the rise, more and more people are looking to invest in them. However, there is still a lot of confusion when it comes to terminology. Two terms that are often used interchangeably are APR and APY.
In this blog post, CoveMarkets will clear up the confusion and explain the difference between APR vs APY crypto.
What Is APR In Crypto?
The annual percentage rate (APR) is the financial value or reward that investors may receive by making their cryptocurrency tokens available for loans, taking into account the interest rates and any other costs that borrowers must pay (APR).
Many sites encourage users to stake their cryptocurrency assets by giving them a high annual percentage rate. Compound interest is not included in the APR.
You cannot lend your coin on all bitcoin exchanges. The ones that do, nevertheless, provide various pricing. Depending on the type of loan or currency you hand out, these interest rates can change dramatically.
What Is APY In Crypto?
Cryptocurrency savings interest, known as APY (annual percentage yields), allows investors to deposit their crypto assets with investment firms in exchange for a rate of return over a specific time period. The annual percentage yield, or APY, is what the borrower must pay in terms of annual interest.
The annual percentage rate (APR) charged to clients who lend their tokens or other digital assets to investors or users of cryptocurrency exchanges is known as the crypto APR.
The crypto assets of investors will be locked for a specific amount of time, and they will be paid a higher fixed interest rate. Although passive income can increase the value of an investor’s portfolio, they cannot exchange locked crypto assets, and variations in the value of the cryptocurrency can impact their income level.
APR Vs APY Crypto: What is The Difference?
In that they are both regular interest rates stated as annual percentage rates, APY and APR for cryptocurrencies are two components that are practically the same. The two, however, differ in several ways. The table below lists some distinctions between APY and APR for cryptocurrency:
|APR disregards compound interest.||Compound interest is taken into account by APY.|
|APY is outperformed by investment growth or borrowing costs.||The cumulative effect raises borrowing costs or investment growth.|
|Recommended for borrowers.||Recommended for savers/investors.|
Formulas and how to calculate APR crypto
Below is the formula to calculate APR in crypto in the following equation:
- APR = Periodic Rate + Number of Periods in a Year
Formulas and how to calculate APY crypto
Here is how to calculate APY in crypto:
- APY = (1 + Periodic Rate)Number of periods – 1
APR vs EAR Crypto Example
A credit card provider may assess one percent interest per month. As a result, the APR is 1 percent multiplied by 12 months to reach 12 percent. This contrasts with APY (EAR), which accounts for compound interest.
The annual percentage yield (APY) to monthly interest rate of 1 percent would be 12.68 percent [(1 + 0.01)12 – 1 = 12.68 percent]. You will be charged the comparable annual rate of 12 percent even if you only keep a balance on your credit card for one month.
However, due to compounding each month, if you hold that sum for the entire year, your effective interest rate of return rises to 12.68 percent.
The Perspective of the Borrower
As a borrower, you are constantly looking for the best rate. When comparing APR and APY, you should be concerned about how a loan could be misrepresented as having a cheaper rate. Earned annual interest (EAR), which considers compound interest, is another name for APY.
For instance, if you are looking for a mortgage, you will probably choose the institution with the best rate. Even though the offered rates seem reasonable, you can wind up paying more for a loan than you had initially planned.
This is due to the fact that banks frequently give you the loan’s annual percentage rate. However, as we’ve already shown, this amount does not account for any semi-annual, quarterly, or monthly loan compounding during the year. The annual percentage rate (APR) is just the periodic rate of interest divided by the number of periods in a year.
Let’s look at an example to help clarify this since it might initially be unclear.
|Bank Quote APR||Semi-annual||Quarterly||Monthly|
Depending on the compounding frequency, a bank may quote you a rate of 5 percent, 7 percent, or 9 percent, but you may actually pay a considerably higher rate. If a bank states an APR of 9%, compounding is not considered in the calculation.
However, when amortizing your debt over a 25 or 30-year period, you will pay 0.38 percent more per year if you take the impacts of monthly compounding into account, as APY does.
This case should illustrate the significance of inquiring about the rate quoted by your potential lender when applying for a loan.
Tip: It’s crucial to compare similar types of data or apples to apples while evaluating various borrowing opportunities so that you may make the best option possible.
The Lender’s Perspective
Now that you may have previously guessed, it is not difficult to understand how being on the other side of the loan tree can substantially impact your results and how banks and other institutions frequently use the APY to entice people.
Those who lend money (what you are really doing by depositing money in a bank) or invest money want to earn the highest interest rate, just as those seeking loans want to pay the lowest interest rate feasible.
If you are looking around for a bank to open a savings account, let’s assume that. Of course, you want one that provides the most return on your money. It is in the bank’s best interest to quote you the APY rather than the APR because the former incorporates compounding and is, therefore, more attractive.
Just make sure you carefully consider how frequently that compounding happens and then contrast that with APY quotations from other banks with compounding at an equal pace. It might have a big impact on how much interest your funds earn.
How To Compare Different Interest Rates?
You can see from the example above that interest can be compounded to yield extra interest. Rates for various items may be displayed as either an APR or an APY. It is crucial to compare using the same phrase due to this disparity. When comparing products, be careful because you can be comparing apples and oranges.
There is no guarantee that products with a higher APY will earn more interest than those with a lower APR. If you know the frequency of compounding, using internet tools to convert APY to APR (or APR to APY) is simple.
DeFi and other types of crypto goods are the same way. To compare like with like when looking at items that might advertise using crypto APY and APR, such as crypto savings and APR vs APY staking, be sure to convert them.
Make sure that the compounding periods are identical when comparing two DeFi products with APY. If both have the same APR but one compounds daily and the other monthly, you could earn more money on your cryptocurrency using the daily compounding option.
What APY means in relation to the particular crypto product you are analyzing is another crucial thing to keep in mind. Rather than the actual or anticipated returns/yield in any fiat currency, certain product collaterals use the word “APY” to refer to the rewards that one can earn in cryptocurrencies throughout the chosen timeframe.
This is a crucial point to understand because the value of your investment (in fiat terms) may increase or decrease depending on the volatility of crypto asset prices.
Even if you continue to earn an APY in digital assets, if the price of crypto assets falls sharply, the value of your investment (in fiat terms) may still be lower than the initial amount you placed in fiat.
As a result, it is crucial that you carefully read the applicable product terms and conditions and conduct your own research to comprehend the investment risks involved fully and what APY means in that particular situation.
Is APR or APY Better Crypto?
The annual percentage rate, or APR, is the cost of earning or borrowing money. Compounding is taken into account by APY but not by APR. The gap between APR and APY widens as interest compounds more frequently. The APY is typically promoted by investment firms, whereas lenders promote the APR.
How Does APR Rate Work With Crypto?
The majority of cryptocurrency interest earned is a fluctuating interest rate determined by supply and demand. Most larger coins have a reasonably steady APR, even though the rate changes. For instance, bitcoin’s normal interest rate range is between 4% and 8%.
Is APY In Crypto Safe?
Although cryptocurrency savings accounts provide better rates than conventional ones, they are less secure because they lack FDIC insurance.
There is a lot of confusion regarding the difference of APR and APY in cryptocurrency. APR stands for Annual Percentage Rate and is the yearly interest rate charged on loan. APY stands for Annual Percentage Yield and is the total return on an investment over some time. Both are important to understand when making decisions about investing in cryptocurrencies.
Hope that this article can help you deeply understand two crypto terms. Thanks for reading!
Disclaimer: The information provided in this article is not investment advice from Cove Markets. Cryptocurrency investment activities are yet to be recognized and protected by the laws in some countries. Cryptocurrencies always contain financial risks.