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What is APY in Crypto? And How to Calculate It

Jimmy Khan

Jun 08, 2022 15:57

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According to Bankrate, the average bank savings interest rate in the United States is 0.06 percent. With conventional savings rates dwindling, it's no surprise that crypto savings accounts, staking, yield farming, and crypto lending are gaining popularity. After all, who wouldn't want to make money while they sleep?


Annual percentage yield (APY) is used in both conventional and crypto finance to describe how much you may earn from your assets. The major distinction is whether your returns are compounded — that is, if your profits create earnings — and for how long. APY is a critical statistic for comparing returns across platforms and assets as a crypto investor.


This post will go through the basics of APY, how it works in crypto, and where it may be used to make money.

What Is An Annual Percentage Yield (APY)?

The annualized return on investment (APY) rate is calculated by taking into account compound interest that accrues or rises with the amount. Compound interest is made up of the interest gained on the original investment and the interest earned on the interest.


APY is a critical indicator for crypto savings schemes and operates similarly to conventional savings. Staking cryptocurrencies, depositing them in savings accounts, or giving liquidity to liquidity pools through yield farming are all ways to make APY on cryptocurrencies.


You may rapidly earn APY on your bitcoin by using cryptocurrency exchanges, wallets, and DeFi protocols.


Typically, investors will get interested in the same cryptocurrency they invested in. They may, however, be paid in the same or a different currency in certain cases.


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Annualized Percentage Yield (APY) vs. Simple Interest Rate

While an annual percentage yield (APY) refers to the predicted rate of return on a deposit or investment after compound interest is taken into account, a simple interest rate includes the interest generated on the initial stake. The primary distinction is that APY considers compounding interest if it applies.


Compounding is a useful investing strategy since it allows you to earn more money. Compound interest is computed over a certain period and applied to the balance, and the interest paid on the entire sum rises with each succeeding month.


Consider investing $1,000 in January 2021 at a rate of 12% per year. Using a basic interest rate calculation, you'll earn a total of $1,000 (1 + 12 percent) = $1,120 after one year, in January 2022.


The same $1,000 staked at 12% a year, but compounded bi-annually in the first six months, will yield 1000 (1 + 6%) = $1,060, or the total after six months.


After a year, you'll have earned $1,123.60 (1+ 6%).


The power of compound interest is responsible for the additional $3.60. As a result, your annualized percentage yield is $1,123.6 $1,000 1, or 12.36 percent.

In cryptocurrency, how does the 7-Day APY work?

The 7-day APY is a yield calculated using 7-day returns, and it's derived by converting the net price difference from seven days ago to today into an annual percentage.


The following is the formula for calculating the 7-day APY:

APY = (X − Y − Z) ÷ Y × 365/7


Where:


X = the price at the end of the seven days


Y = the price at the start of the seven days 


Z = any fees for the week


This number is determined to assist investors in determining the weekly yield or return.


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Is the Annual Percentage Yield (APY) a True Reflection of Final Earnings?

The amount of profit or earnings you may make is expressed as an annual percentage yield, or APY. Your final rewards may vary depending on how long you stake your coins, and the amount you earn will be determined by the holding time.


How do you calculate the annual percentage yield (APY) in cryptocurrency?


After compounding, the annual percentage yield (APY) on any quantity of money or investment is calculated.


The following is the formula for determining the annual percentage yield (APY):


APY = (1 + r/n)ⁿ − 1


Where:


r = periodic rate of return (or annual APR)


n = number of compounding periods each year


Calculating APY in crypto is the same as it is in conventional finance: to come up with a percentage yield.


However, depending on the exchanges, there are several methods of determining APY. Bybit, for example, provides flexible savings, allowing users to stake and unstake tokens at any moment to get assured rewards without compounding interest. The APY is determined using a simple interest formula, in which the daily yield indicates the interest rate that will be transferred into your wallet based on the number of tokens you have staked.


This is the formula:


Daily yield = total staked tokens (APY for staked token 365)


For example, if you staked 10,000 USDT for a 9 percent guaranteed APY the following day, you may get a rounded-off to the closest integer of 2.5 USDT. The formula is 10,000 (0.09 365) = 2.4657 USDT.


There will be no yield applied to your account if you unstake your tokens after receiving the daily payouts. In other words, any modifications to the original staked asset will impact the daily yield.

Place a bet and earn up to 120 percent. Bybit APY.


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What Does Annual Percentage Rate (APR) Mean?

The annual percentage rate, or APR, is the interest you earn on your assets over a year expressed as a percentage. This amount may include borrowers' costs. It's a great tool for evaluating various investment packages since it regularly provides yearly interest rate data.


The terms APY and APR are extremely similar, and APR, unlike APY, does not account for compounding.


For example, if you invest 10,000 coins at a 10% annual percentage rate, you will get 1,000 coins in interest after a year. With APY, however, the picture changes dramatically.

You may use the following formula to compute APR:


APR = [(Fees + Interest) Principal]÷n*365 100


Where:


P stands for the major investment.


N is the number of days in a period.


APR is often used in conventional finance to explain conditions for borrowers, such as the credit card interest rate that borrowers must pay. This interest rate may also refer to the amount paid to investors. Because of compounding, the APY for a loan is often larger than the related APR.

What's the difference between APY and APR?

The main distinction between annual percentage yield (APY) and annual percentage rate (APR) is that APY includes compounding interest, while APR does not. APR also considers any fees or other expenditures linked with the investment transaction. Put another way, the annual percentage rate (APR) is computed using basic interest and includes fees.


One crucial difference influences how APY and APR are utilized in practice. Because APY considers compounding, the result is always a greater interest rate (a bigger number). As a result, it is frequently favored when financial items relate to anything that will make people money, such as interest on a bank savings account. In contrast, while APR is a lower interest rate, it is utilized for items that cost individuals money, such as credit card or mortgage interest rates.


To determine the true rate, convert APR to APY. A credit card, for example, may offer a monthly interest rate of 1.5 percent or an annual percentage rate of 18 percent. Due to the compounding interest applied to your debt each month, your APY (actual rate) will be 19.56 percent if you keep your credit card balance for a year.


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Inflationary Pressures on Cryptocurrency APYs

Inflation is defined as a decrease in the value of a currency over time. In the crypto world, inflation is the process of adding new coins to the blockchain network at a set pace. Cryptocurrencies, such as Bitcoin, are appealing because they are meant to have predictable and low inflation rates.


The staking rewards are affected by the inflation rate for a certain network. If the inflation rate on your coin is greater than the APY, your earnings are degrading at the same pace as you're adding them.

The Laws of Supply and Demand

As in any market economy, the law of supply and demand has an impact on price. A cryptocurrency owner may successfully lend their coin to earn interest money. Market dynamics may set the rates since interest is generated depending on the desire to borrow that crypto.


When there is a plentiful supply of money, the interest rate paid for borrowing it is lower, and when there is a scarcity of it, it is higher. Similarly, crypto APY varies according to each currency's demand for and liquidity.

Periods for Compounding

The amount of compound used in the APY calculation, which might vary, also impacts the APY computation. Remember that as the number of compounding periods grows, so does the APY.


Let's have a look at an illustration. Your annual percentage yield (APY) on a $100,000 deposit compounded monthly at 5% will be 5.116 percent. The formula is 100,000 (1 + 0.05 12). (12). By the end of the year, your account balance will be $105,116.


On the other hand, Compounding daily will result in a total balance of $105,127 at a 5.126 percent annual percentage yield at the end of the year. The formula is 100,000 (1 + 0.05 365). (365).

The more possibilities for your hobby to flourish, the more money it may make.

APY-Based Crypto Investments

If you're a HODLer, you don't have to keep your crypto in a wallet and wait for it to appreciate.

There are various methods to invest your crypto and benefit from the compound interest or annual percentage yield (APY) to increase and double your holdings.

Lending and Borrowing in Cryptocurrencies

If you're looking to invest in crypto for the long term, crypto lending may help you extract more value from your assets.


Crypto financing functions similarly to regular lending but without the red tape and paperwork. Furthermore, rather than lending conventional money, you're lending bitcoin. You earn interest or dividends when you lend your crypto to borrowers on a decentralized platform. Depending on the platform, interest rates might vary from 3% to 17%.


While crypto lending offers investors a passive revenue stream, borrowers benefit from increased liquidity.

Borrowing in Bitcoin

Imagine you have 10 BTC and are in desperate need of cash, but you don't want to sell any of your cryptos since you feel their value will skyrocket in the future. You're worried that if you sell your Bitcoin, you'll wind up with less crypto when you buy it.

So what are your options?

You may use your 10 BTC as collateral on crypto lending services and get a loan. However, keep in mind that you may need to "overcollateralize," which is a fancy way of stating you'll need to lock up considerably more crypto than the amount you intend to borrow.


Your collateralized BTC will be returned when you repay your loan in full – and if the market is on your side, that BTC may have increased in value.


Platforms that link crypto lenders and borrowers are known as lending platforms. Here's how it works:

A borrower approaches a lending site and wants a loan. When the platform approves the request, the borrower must put up some of their cryptos as collateral for the loan. The lender funds the loan and regularly gets interest payments at the agreed-upon APY. This continues till the loan tenor expires.

Once the borrower has paid back, the total loan amount is the collateralized crypto returned.


Investing in cryptocurrency lending is simple. To begin, locate a reputable lending platform.


Decentralized and centralized platforms are the two sorts. Decentralized lending systems are managed by smart contracts, eliminating the need for middlemen. On the other hand, Centralized platforms use the help of a third party to oversee the loan process.


Before joining up with a loan site, do your research to make sure it's credible. Then, to make the most out of your digital assets, double-check and compare the given APY.

Farming for Profit

Yield farming is the practice of proactively lending your crypto assets to generate additional crypto. Yield farmers transfer their assets across multiple markets to pursue the best yield, and they treat it like a trading technique. Farmers that produce the highest yields keep a close eye on the annual percentage yield (APY) and take advantage of the best possibilities. Farmers who invest in yield often earn considerably better rates than those who save fiat money in the bank.


Crypto staking is a method of earning rewards with your cryptocurrency by verifying cryptocurrency transactions on a blockchain network. In essence, you may make money by participating in PoS networks, which bring stakeholders together to validate the network. You're not just safeguarding the network but also earning crypto.


The more currencies you provide to the network, the more probable you will be picked as a validator to add blocks to the blockchain. Unlike crypto mining, you do not need any particular hardware to get rewards. When you stake, you remove your crypto from circulation for a certain amount of time, which effectively reduces the coin's supply, boosting its value.


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What Can You Do With Interest You've Earned?

Earned interest is added to your portfolio as a profit earned with little effort. This is what a passive income is. You have the option of continuing to attempt to earn additional interest on that money or investing the interest you have already earned. There are numerous opportunities to trade spot crypto and derivatives on the cryptocurrency market.


Spot crypto trading is the act of buying and selling cryptocurrencies on an exchange at current market pricing. You can also trade derivatives, and financial contracts with a value tied to a cryptocurrency. Futures and options contracts are derivatives contracts that provide additional ways to access and trade cryptocurrencies.


You can, of course, use that earned interest as a store of value. As a store of value, crypto is intended to keep its buying power for future usage. Because gold has traditionally been viewed as a great store of value, Bitcoin, the most widely used cryptocurrency, is sometimes referred to as "digital gold." In derivatives trading, the value of the underlying asset is estimated, and it's also possible that the underlying asset is a cryptocurrency.

APY Risks and Benefits 

Cryptocurrencies are more volatile than fiat currencies, bonds, and most other financial instruments.

Someone who bought the Bitcoin top at $69,000 in November 2021, for example, would have seen a 52.5 percent drop to $32,900 at one point. The Bitcoin price has since rebounded, but you'll need to 'HODL' during periods of high volatility as a crypto investor.


Earning an APY in crypto, on the other hand, usually outperforms bank interest rates and the rate of return on most other financial investments.


Even after a multi-year bear market, blue-chip cryptos like BTC and ETH have always recovered to new all-time highs.


The crypto markets and NFTs have produced the biggest returns over the previous decade, albeit past performance is no guarantee of future outcomes. Despite the price drop from $69,000, Bitcoin is still more expensive than in 2020 and every year before that.


All of the cryptos listed on the APY platforms we looked at are well-known tokens. Suppose you see APY percentages of 2000 percent or higher on a yield farming platform or decentralized application (dApp). In that case, those are usually new projects trying to compensate for their high risk by offering a higher APY or potential scams.

Conclusion

According to keyword research data, the phrase "What is APY in crypto" is typed into search engines like Google 1,600 times per month. It's becoming a more popular way to generate passive income and a viable alternative to banks, which can pay as little as 0.05 percent interest on savings deposits.


The best APY crypto rates differ by coin and platform. To diversify your portfolio and reduce risk, consider opening multiple accounts with different crypto interest providers.