What does APY mean in cryptocurrencies? If you are involved in yield farming, you may have already heard of APY or APR. They are used in many crop farming programs in DeFi protocols.

In this article, we'll make APY in crypto simple and show you how to calculate it in your yield farming. Be patient and read the article until the end as it is not only important but also provides information to help you To invest more effectively.

APY vs compound interest

First, you must learn the difference between simple interest and compound interest to understand APY in cryptocurrencies.

Simple interest is the interest earned only on the original deposit while compounding is the process of adding the interest earned each period on both the original investment and the reinvested profits (here the interest earned from the previous period).

To better illustrate these concepts, we will provide an example:

You have $100 and you lend it to someone at an interest rate of 10% per year in January 2020. In January 2021, you hope to get your money back and earn an interest amount of $10.

The amount you will receive after one year is equal to:

100 * (1+10%) = $110

Now, let's look at another scenario. In this case, you also have $100, which you lend to your friends at 10% interest per year. The loan is doubled semi-annually.

In the first six months, you will have:

100*(1+5%) = $105

The amount you will receive after one year is equal to:

105*(1+5%) = $110.25

So, at the end of January 2021, when you get your refund, you'll get $110.25. This 25 cents is the magic of compound interest.

Compounding allows you to produce money over time, which is why it is a powerful investment tool. This is not the same as simple interest. The term “simple interest” refers to the interest earned only on the principal deposit.

What is APY in cryptocurrencies: APY explained

What is APY in cryptocurrencies? APY (Annual Percentage Yield) is the actual annual return, taking into account the effect of compound interest. Unlike simple interest, compound interest is calculated periodically and the amount is immediately added to the balance. With each subsequent period, the account balance becomes a little larger, so the interest paid on the balance is also larger.

APY is a way to measure how much money a money market account earns over the course of a year. In other words, this is a way to measure the accumulation of interest over time.

How does APY work in cryptocurrency? If you are encryption If you're an investor looking to get a return on your investment while holding it, crypto savings accounts with APY may be exactly what you need. There are a variety of cryptocurrency return charts to choose from. As a result, before joining one, do your research. Fees, entry restrictions, interest earning procedures, and types of crypto assets that can be accessed may vary from one platform to another.

There are also promotional APYs offered by cryptocurrency exchanges, but you should be careful before investing in them. Some of these programs use the tactic of first giving a higher APY to attract customers and then lowering the prices after getting a large group of customers. If you come across a high-yield farming platform or software that offers high APY rates, be sure to check the reliability of its community.

APY Examples:

Survey rewards

Example: You stake Ethereum (Ethereum) on a platform like Coinbase or Binance. The APY would be around 4-6%, which means that if you hold 10 ETH, you can earn 0.4 to 0.6 ETH over the course of a year.

Crop cultivation

Example: On a DeFi platform like Uniswap or SushiSwap, you can provide liquidity for a trading pair like ETH/USDT. The APY rate for providing liquidity can range between 10-20%, depending on trading volume and fees.

Savings accounts

Example: I made a deposit US dollars In a cryptocurrency savings account on platforms like Celsius or BlockFi. APY can be around 8-12%, so if you deposit $1,000, you could earn between $80 and $120 in interest over the course of a year.

Crypto lending

Example: You lend Bitcoin (Bitcoin) on a platform like Aave or Compound. The APY for lending BTC may be 3-7%, so if you lend 1 BTC, you can earn 0.03 to 0.07 BTC in interest per year.

Crypto savings plans

Examples of this are fixed-term savings options on Binance, such as flexible saving or fixed saving. Depending on the term and cryptocurrency you choose, you may see APYs ranging from 5% to 15%.

How is APY calculated in cryptocurrencies?

Below is a detailed explanation of how APY is calculated.

APY calculation formula

APY = (1 + Y/N)^N – 1

In it:

• r is the periodic rate of return (referred to as annual APR)
• n is the number of years of installation

For example:

Y rate = 55.44%

APY = (1+ 55.44%/365)^365 – 1= 74.02%.

Factors that affect APY in crypto

What you will end up earning with APY in cryptocurrencies depends on the interest rate on the platform and the type of cryptocurrency you are using. Supply and demand for Decentralized finance Platforms also play a big role. Don't forget that platform fees and costs can affect your overall earnings. Lockdown periods and planting or cultivation strategies may also affect yields. Finally, broader market conditions and risk factors associated with cryptocurrency assets can impact APY.

APY vs APR In encryption: what's the difference?

APR vs. APR: Is there a difference between them?

When it comes to APR in the context of savings, it means recurring rate. For example, if you save $1,000 in your account at an annual interest rate of 10% and that interest is calculated once a year, you will receive $100 in interest after one year.

The APY will depend on the effect of compound interest. If you still use the example above, you have $1,000 with an APY of 10% and that interest is paid twice a year. For the first 6 months you get $50 (1000 * 10% / 2).

However, in the last six months of the year, you will add $50 to the funds received in the first six months. At this point, the amount you will receive will be $52 (1050 * 10% / 2).

Typically charged on credit card loans, the APR is the interest rate that is charged on the outstanding credit card balance that a person has not paid. Meanwhile, APY will be applied to the case of companies coming to deposit money in banks. Banks often use APY to attract customers to deposit money.

Banks usually keep the difference between APR versus APR secret. However, if you take a look at the example above, you can see that the higher the annual interest rate, the greater the difference between the APR and APY.

The difference between APR and APY can have a significant impact on the financial decisions of borrowers and investors. In short, banks often emphasize APY to attract investors to savings accounts and show how high interest rates can be. As you apply for a credit card or loan, they will insist on the APR to show you the actual cost you will be paying.

Benefits and risks APY in crypto

What are the main benefits and risks of APY in cryptocurrencies?

benefits

APY in the world of cryptocurrencies can be really attractive, often offering much higher returns than traditional savings accounts. For example, some platforms may give you returns of 5-15% or more. It's a great way to boost your profits, especially since traditional banks often offer lower interest rates.

Getting involved in cryptocurrency staking, yield farming or lending means you can passively make money from your cryptocurrency holdings without being tied down to ongoing trading. You can also spread your investments across different assets and strategies to better manage risk. Many cryptocurrency savings options offer flexible terms, so you can access or reinvest your money as you see fit.

And with all the innovative financial products in the cryptocurrency space, you have access to unique profit opportunities that you will not find in traditional finance.

Risks

Cryptocurrencies can be very volatile, so the value of your investments may fluctuate up and down a lot, even if the APY looks great. There is also a risk of platform issues – DeFi platforms and exchanges can sometimes experience security issues, hacks, or other failures that could result in you losing your funds.

As the regulatory landscape for cryptocurrencies continues to change, new laws may impact how APY earning platforms work or your ability to access your funds.

Also, some cryptocurrency savings plans may require you to keep your funds locked for a period of time, which may limit your access to your funds when you need them.

Frequently asked questions