APR Vs APY Difference: What Does it Mean in Crypto & Why it Matters

APR Vs APY Difference: APR (annual percentage rate) and APY (annual percentage yield) are important concepts in calculating interest on a variety of crypto investments or loans. Investments may include transferring funds to liquidity pools on exchanges, staking, yield farming, crypto savings accounts, and other activities.

Some of these investments may pay you interest based on the APR rate, whereas others calculate the payout using the APY method. To allocate your funds to the most profitable income sources, any crypto investor must understand the difference between APR and APY.

What is APR?

APR is used in this simple interest rate calculation. APR, or annual percentage rate, refers to the ordinary interest applied to the principal amount of an investment or loan, whether in traditional banking or the crypto world. It ignores the concept of compound interest, which we’ll go over in this article.

APR stands for annual percentage rate. If an investment or loan is held for less than a year, interest is calculated pro-rata. A half-year investment with an APR of 5%, for example, will earn you exactly half the interest, or 2.5 percent, on your principal.

Assume you put 1.0 Ether into a lending pool on a decentralized finance (DeFi) platform to earn interest, and the APR is 24 percent. If you leave your funds in the pool for 365 days, your total investment will increase to 1.24 Ether. This includes your 1.0 Ether principal as well as the 0.24 Ether in interest (based on a 24 percent APR).

APR is a fairly simple interest rate concept. The basic formula for calculating a total final amount based on APR is as follows:

A = [P × (1 + R×T)]

Where

A: total final amount

P is the principal, i.e., the initial investment or loan amount.

R: interest rate used

T :time in years

Using our 1.0 Ether investments, the figures in the formula are:

1.0 Ether (1 + 0.24×1) = 1.24 Ether

This assumes an investment period of exactly one year. If you hold the investment for a three-month period, i.e., one quarter (0.25) of a year, then the formula yields:

1.0 Ether [1 + (0.24 × 0.25)] = 1.06 Ether

What is APY?

APY, or annual percentage yield, is a rate of return on an investment or loan that takes compounding or compound interest into account. Compounding interest can occur at any time constantly, daily, weekly, monthly, or annually. Compounding interest complicates calculating the APY because it takes into account the number of periods at which the amount is adjusted based on the interest rate.

The following is the formula for calculating the final amount based on APY:

A = [P (1 + R/N)N]

Where

A : total final amount

P : principal, i.e., the initial investment or loan amount

R : interest rate used

N : number of compounding periods

The N value – the number of compounding periods is the most important part of the formula. It is the distinction between APY and APR. The number of compounding periods refers to how many times the investment amount is recalculated using the quoted nominal interest rate.

The interest is added to an amount that includes the initial investment plus all previously accrued interest earnings during each recalculation.

Assume you invest 1.0 Ether for a year at a 24 percent APY and your investment has two recalculation periods: 6 months and 12 months.

The figures in the APY formula in this scenario are:

[1.0 Ether × (1 + 0.24/2)2] = 1.2544 Ether

APY vs APR: Main differences

While the annual percentage rate is the amount that must be paid as interest, the annual percentage yield describes the amount of interest earned over the course of a year. When comparing the APR and APY returns, the main distinction is compound interest because all other elements—including the principal amount, interest rate, and time period—are the same.

It represents the overall return, which includes interest and principal investment earnings. The APY always returns a larger amount because the APR ignores compound interest. In addition to funding liquidity pools on exchanges, cryptocurrency owners can store their coins in savings accounts, stake their coins, or invest in yield farms.

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To understand where money is best invested, it is essential to understand the distinction between the APY and the APR. Practically speaking, borrowers benefit from APRs. To maximize their profits, investors should, however, take into account APY rates.

Investors must use manual compounding, where they must reinvest their gains on a daily or weekly basis to obtain a higher compound interest rate, as more DeFi tools and cryptocurrencies use APRs.

Where Are the APR and APY Used In Crypto?

APR rates are frequently advertised in traditional finance, especially for loan products, whereas APY rates are more frequently used to market some investment products. Both APR and APY are widely used in the cryptosphere for a variety of lending and borrowing opportunities, liquidity pools, staking services, yield farms, and other finance-related crypto platforms, including DeFi protocols, centralized exchanges (CEXs), and others. The vast majority of centralized and large DeFi crypto finance companies offer products with both APR and APY rates.

Which Is Better in Crypto? APR or APY?

APR Vs APY: Naturally, APR rates are more advantageous when borrowing money, whereas APY rates are better when investing. When investing in cryptocurrency for yield, the power of compounding can do wonders for you.

For instance, you can stake a variety of well-known coins with interest paid in APY using the Bybit Savings product suite in a low-risk, withdrawal-guaranteed environment.Both flexible and fixed-term investment periods are available. For some stablecoins, the platform currently offers an APY rate of 5% or higher. These stablecoin investment APY rates are among the highest in the market.

Also Read: Crypto Tax India: 1% TDS On Crypto In India, How To Calculate Your Crypto Taxation

Conclusion

When it comes to maximizing the profits of your crypto investments, APR and APY are the two terms that considerably influence how much you earn or must pay. Understanding the difference between APR and APY is critical for making knowledgeable choices and maximizing returns.

Understanding the difference between these APY and APR is essential for any crypto investor who wants to make wise decisions and maximize profits. While APR focuses on simple interest, APY considers interest compounding, resulting in better overall returns.

Frequently Asked Questions

Q. Is APR better than APY?
A. APY is better since it provides the most accurate estimate of an account’s earning potential.

Q. What is the APR rate?
A. The annual percentage rate (APR) is the cost of borrowing money given as a yearly percentage.

Q. How is APR calculated?
A. APR is derived by multiplying the periodic interest rate by the number of periods in a year in which it was applied.