What is Annual Percentage Yield (APY) in Cryptocurrency?

According to Bankrate, the average US bank savings rate is 0,06%. With traditional savings rates soaring, it should come as no surprise that crypto-savings accounts, stacking, profitable farming and crypto lending attract significant attention. After all, who wouldn't want to earn passive income?

Annual Percentage Yield (APY) is a common term used in both traditional finance and cryptocurrencies to explain how much you can earn from your assets. The main difference usually lies in whether your income is compounded - that is, whether your income generates itself - and over what period of time. As a crypto investor, APY is a key metric to help you compare returns between platforms or assets.

In this article, we will explain the concept of APY, how it works in cryptocurrency, and the investment opportunities where APY matters.

What is APY?

APY is an annual rate of return on an investment that takes into account compound interest that accrues or grows with the balance sheet. Compound interest includes the interest earned on the original deposit plus the interest accrued on that interest.

While APY is commonly associated with traditional savings, it is an important metric for crypto savings programs and works in a similar way. Crypto investors can earn APY on cryptocurrencies by betting on them, placing them in savings accounts, or providing liquidity to liquidity pools through profitability.

You can quickly start earning APY on your cryptocurrencies through cryptocurrency exchanges, wallets and DeFi
Decentralized Finance (DeFi) takes the decentralized blockchain concept and applies it to the world of finance. Build ...
protocols.

Typically, investors receive interest in the same cryptocurrency in which they deposited funds. However, there are times when they may receive payments in the same or a different currency.

Simple interest rate versus annual interest rate

While APY refers to the projected annual return on a deposit or rate after accounting for compound interest, simple interest rate only takes into account the interest earned on the original rate. Thus, the main difference is that APY takes into account the effect of compound interest, if applicable.

Compound interest is a powerful investment tool because it allows you to earn additional income over time. Compound interest is calculated for a certain period, and the added value is added to the balance sheet. With each additional period, the interest paid on the total balance also increases.

To make it easier to understand, consider the rate of $ 1 at an interest rate of 000% per annum in January 12. One year later, in January 2021, using a simple interest rate calculation, you would get a total of 2022 × (1 + 000%) = $ 1.

That same $ 1 wagered at 000% per annum, but with half a year adding up interest in the first six months, will give you 12 × (1000 + 1%) = $ 6, or the total in six months.

After a year, you will earn 1 × (060 + 1%) = $ 6.

That extra $3,60 comes from the power of compound interest. So your annual interest income is the income you earn in a year: $1 ÷ $123,6 - 1, or 000%.

How does 7-day APY work in cryptocurrency?

The 7-day APY is the annual return using the 7-day return. It is calculated by taking the net difference in price 7 days ago and today and getting the annual percentage.

The formula for calculating the 7-day APY is as follows:

APY = (X - Y - Z) ÷ Y × 365/7

Where:

X = price at the end of the 7-day period.

Y = price at the beginning of the 7-day period

Z = any weekly fees

This calculated amount helps investors understand the weekly rate of return or rate of return.

Does APY represent final income?

APY represents the rate of return, or the amount of profit or earnings you can get. Depending on how long you decide to stake your coins, your final income will be different. The retention period will determine how much you actually earn.

How to calculate APY in cryptocurrency

APY measures the level of profit earned annually as a return on any amount of money or investment, after accounting for compound interest.

The formula for calculating APY is as follows:

APY = (1 + r/n)ⁿ - 1

Where:

r = periodic rate of return (or annual APR)

n = number of compounding periods per year.

The calculation of APY in cryptocurrency is the same as in traditional finance, and the goal is similar - to get a percentage yield.

However, there are other ways to calculate APY, depending on the exchange. For example, the exchange offers a flexible rate that allows users to put tokens on the line and withdraw them from quotes at any time in order to get guaranteed profitability without the element of compound interest. APY is calculated in simple interest format, where Daily Yield is the percentage rate that will be credited to your wallet based on the number of tokens you have staked on.

The formula is as follows:

Daily yield = Number of all tokens delivered × (APY for token delivered ÷ 365).

For example, if you bet 10 USDT on a guaranteed APY of 000%, then the next day you can get 9 USDT rounded to the nearest whole number. The calculation looks like 2,5 × (10 ÷ 000) = 0,09 USDT.

However, if you decide to withdraw your tokens from trading after receiving the daily yield, the yield will not be credited to your account. Basically, any changes to the asset that the original bet was made on will affect daily returns.

What is the Annual Percentage Rate (APR)?

APR, or Annual Interest Rate, is the percentage you receive on your investment in a year, expressed as a percentage. This figure may include fees paid by borrowers. It is a useful tool for comparing different investment products as it provides a common basis for presenting annual interest rate data.

APY and APR sound very similar. However, unlike APY, APR does not account for compound interest.

For example, if you wager 10 coins at an APR of 000%, then after a year you will receive 10 coins as interest. But with APY, the situation is changing significantly.

To calculate APR, you can use the following formula:

APR = [(Commission + Interest) ÷ Principal] ÷ n × 365 × 100

Where:

P = principal investment

N = number of days in the timeline

In traditional finance, APR is often used to negotiate terms and conditions for borrowers, such as the interest rate on a credit card that the borrower must pay. This interest rate can also refer to the interest paid to investors. Typically, the APY for a loan is higher than the corresponding APR due to the compounding effect.

Factors Affecting Cryptocurrency APY

Inflation

Inflation is the loss of value of a currency over time. In cryptocurrencies, inflation refers to the process of adding new tokens to the blockchain network, usually at a predetermined rate. The attraction of cryptocurrencies like Bitcoin is that they are designed to have a predictable and low inflation rate.

The inflation rate in a particular network affects the rate of return. If the inflation rate in your coin is higher than APY, then your income will decrease as quickly as you increase it.

Supply and demand

As in any market economy, the law of supply and demand affects pricing. A cryptocurrency owner can effectively lend their cryptocurrencies to generate interest income. Since interest is charged based on the demand for the cryptocurrency, market dynamics can drive rates.

The interest rate charged for borrowing money is generally lower when there is a lot of supply and higher when there is little. Likewise, the APY of cryptocurrencies is volatile and changes depending on the level of demand and liquidity of each coin.

Compounding periods

The calculation of APY is also influenced by the compounding period, which can vary. Remember that APY increases as the number of compounding periods increases.

Let's take an example. If you place $ 100 on a deposit with monthly addition at a rate of 000% per annum, your APY is 5%. The calculation uses 5,116 × (100 + 000 ÷ 1) ^ (0,05). By the end of the year, your balance will be $ 12.

On the other hand, if compounding is done daily, your final balance by the end of the year will be $ 105 with an APY of 127%. The calculation uses 5,126 × (100 + 000 ÷ 1) ^ (0,05).

The more opportunities for your interest to grow, the more they can earn.

Investments in cryptocurrencies taking into account APY

If you belong to the HODLing type, then you don't have to just keep the cryptocurrency in your wallet and wait for it to rise in price.

There are ways to invest in cryptocurrency and use the magic of compound interest or APY to grow and multiply your assets.

Lending and borrowing cryptocurrencies

If you are planning on investing in cryptocurrency in the long term, you can get a lot more value from your assets through crypto lending.

Crypto lending works in much the same way as traditional lending, but without all this red tape and paperwork. In addition, you are lending cryptocurrency, not paper money. When you issue your cryptocurrency on a decentralized platform to borrowers, you receive interest or crypto dividends. Depending on the platform, interest rates can range from 3% to 17%.

While crypto loans provide investors with a passive stream of income, borrowers also benefit from additional liquidity.

Crypto-loan

Let’s say you have 10 BTC and you urgently need money – but you don’t want to sell your cryptocurrencies because you believe that their future value will be parabolic. You fear that if you sell your bitcoin, you may end up with less cryptocurrency when you buy it back.

What can you do?

Crypto lending platforms will allow you to use your 10 BTC as collateral and get a loan. But keep in mind that you may have to “refinance”, that is, pledge much more cryptocurrency than the amount you want to borrow.

When you repay the loan in full, your collateral BTC will be returned - and if the market is favorable to you, these BTC will probably rise in value.

Crypto lending

Lending platforms connect crypto lenders with borrowers. This is how crypto lending works:

The borrower requests a loan from the lending platform. Once the platform approves the request, the borrower must pledge some of their cryptocurrencies as collateral for the loan. The lender finances the loan and periodically receives interest payments at an agreed interest rate. This continues until the end of the loan term.

The borrower returns the entire loan amount, and only after that the collateralized cryptocurrency is returned to him.

Investing in crypto lending is simple. First you need to find a good lending platform. There are two types: decentralized and centralized platforms. Decentralized lending platforms are managed by smart contracts without any intermediation. In contrast, centralized platforms involve a third party that manages the lending process.

Before signing a contract with a lending platform, please do due diligence and make sure it is reliable. Then, confirm and compare the offered APYs to get the most out of your digital assets.

Yield farming

Income farming is the active lending of your cryptoassets in order to earn more cryptocurrencies. Income farmers move their assets around different marketplaces in search of the highest returns and refer to this approach as a trading strategy. The most successful farmers constantly monitor APY and take advantage of the most profitable opportunities. The profitability of farmers is usually much higher than when holding fiat currencies in a bank.

Stacking

Crypto-staking is a method of earning rewards with cryptocurrencies by confirming crypto-currency transactions on the blockchain network. In essence, you can earn income from PoS-networks that bring stakeholders together to verify the network. Not only do you keep the network safe, but you also earn cryptocurrency in the process.

The more coins you transfer to the network, the more likely you will be chosen as a verifier to add blocks to the blockchain. Unlike cryptocurrency mining, you do not need any special equipment to receive rewards. When you place a bet, you block your cryptocurrency by withdrawing it from circulation for a specified period. This effectively limits the supply of the coin, which can also positively affect its value.

What can you do with the interest earned?

The interest earned goes into your portfolio as a profit earned with relatively little labor. This is the definition of passive income. You can keep trying to earn more interest on that income, or you can take the interest earned and use it to trade. The cryptocurrency market abounds in opportunities for trading spot cryptocurrencies and derivatives.

Spot cryptocurrency trading means buying and selling cryptocurrencies at the current market rate on the exchange. You can also trade derivatives, which are financial contracts whose value is based on the underlying cryptocurrency. Derivative contracts such as futures and options offer additional ways to access and trade cryptocurrencies.

Of course, you can also take that earned interest and use it as a store of value. As a store of value, this cryptocurrency must retain its purchasing power for use at a later date. Notable stores of value have included gold, which is why the most popular cryptocurrency, bitcoin, is often referred to as “digital gold.” In derivatives trading, value is valued at the underlying asset. Cryptocurrency can also be the underlying asset.

Сonclusion

Every investor needs a method to compare investment opportunities and calculate profits. APY, or Annual Percentage Yield, is a standard rate of return calculation used in both traditional finance and cryptocurrencies. It includes the effect of compound interest, which can increase the amount earned. The higher the APY, the more money investors earn. Comparing APY options can help you identify the most attractive investment opportunities.