Annual percentage yield or APY in crypto refers to the rate of return you can get over a year. You can see the result within a year and even every 5 minutes. An APY works through compounding interests and regularly computing them to see if they are still gaining.
In the U.S, the computation of Bankrate says that the It is not surprising that cryptocurrency savings accounts are getting more prominent. Since cryptocurrency passively offers higher interest rates, people are joining the trend and are transferring their money to the digital world.
What is the job of the APY in the cryptocurrency world? In this article, we will discuss what an APY is crypto, the difference between the standard rates, how to calculate the APY, and the factors that can affect it.
What is APY?
Annual percentage yield or APY may act as a cryptocurrency savings account similar to regular savings accounts at the bank.
Moreover, you may use your digital assets, such as Bitcoin, to gain a fixed rate over a year. APY in crypto works by calculating the amount of rate earned on the crypto market after a year.
Similar to a common interest, crypto investors can also trace the yield of their crypto assets and how the trend goes in just a matter of time. Annual Percentage Yield (APY) is a technique that allows you to track the compound interest in a certain period. Compounding interest is a better way to increase the investment you put up at first.
In APY in crypto, the rate is compounded annually. It means that every month of the year, it will add interest to your initial deposit. It results in a more significant return than APR, which most banks offer.
Investors are using APY in crypto, similar to a savings program. You can earn interest by staking your cryptocurrency, putting your crypto in your accounts, or using yield farming and other liquidity providers or liquidity pools.
Difference Between APY and APR
In a nutshell, APY and APR are interest rate gains during a year or certain compounding periods. APY means annual percentage yield, while APR means annual percentage rate. In APY, a crypto investor can earn a projected compound interest via stake or deposit because it is monthly compounding. In APR or annual percentage rate, they use a simple interest computation where you can only make a fixed amount at the end of the year.
The interest rate is the primary difference between APY and APR. In traditional finance, the rate is unchanging from the beginning to the end of the year. Whatever happens to the economy, your earnings will not change by the end of the year. However, if a big increase happens, your annual return will not also increase.
For instance, your investment is under APR, and the fixed interest rate is 10% annually. If your initial investment is $10,000, after a year, the projected rate will be $11,000.
Moreover, compound interest is what you will expect in APY. The annual interest rate is not the same as a simple rate. Crypto investors prefer it because they will earn more over a specific period. The interest earned at the end of the year is greater than a simple interest rate.
APY Calculation in Crypto
We can take the same amount we had in APR which is $10,000. It will make the comparison more visible and valid. Imagine that your cryptocurrency is getting an annual interest of 10% per annum but it is accumulating. A compounding interest grows every month or twice a year depending on your investment.
So if you are staking $10,000 with a compounding interest of 10.47%, it will give you the following amount based on the formula, one plus the interest rate divided by the compounding time raised to the frequency minus one.
Take a look at the table below to visualize APY:
|Month||Staked Amount ($)||Interest (APY)||Total Interest per Month ($)||New Total per Month ($)|
As you can see on the table, after a year, $10,000 will gain an interest of $1,047.13. Doing the same process with APR will only give you an earning of $1000 in a year. Another easy way to compute for APY is biannual.
For example, if you are staking $2000 and the biannual interest is 6%, it will give you $2000 x ( 1 + 6%) = $2,120, after six months. After the next six months, you will get $2,120 x (1 + 6%) = $2,247.2.
Factors Affecting the APY in Crypto
Even though APY in crypto gives you more earnings, it is still changing and sometimes can become unstable depending on so many factors. Unlike bank interest, annual percentage yield is changing and accumulating. Therefore, it is more prone to several changes compared to APR. Here are some of the factors that can influence Crypto APY.
Inflation means losing the value of a certain cryptocurrency over time. In the cryptocurrency world, inflation refers to adding new coins to the blockchain. Inflation can be high or low. Bitcoin, for example, has a low inflation rate and a predictable value.
Over time, crypto investors and scholars are getting the hang of the cryptocurrency world. Inflation can affect the returns of your investment at a particular rate. If your crypto coins are experiencing a high inflation rate, then the possibility of your earnings going down is also high.
Law of Supply and Demand
Crypto market prices are highly affected by the demand of the investors and supply from the blockchain. If there is a high demand for a certain cryptocurrency, the supply will increase, and most investors will take this opportunity to sell their cryptos.
Furthermore, if people can no longer afford to buy any crypto because of price increases, the trend will decrease. The demand will be low, and the supply will be low too. However, there are still some instances where the supply is still high since not all crypto holders will sell their coins.
The law of supply and demand affects the rate of interest earned. If the supply is scarce, then the rate will be higher. If the supply is more than enough, the rate will be low. The liquidity of the cryptocurrency coin can also affect your annual return gained.
Compounding periods can also affect the interest income you can get. The compounding interest of the APY in crypto varies depending on how long you will hold it. The longer you keep it on the market, the higher the chance of getting more interest paid.
Similar to the example shown above, the compounding periods can be divided into months, half a year, a whole year, and more. There is also a greater potential for your initial investment to increase on its own if your plan is long-term. Nevertheless, you can never really predict the future. You can just do research and base your decision on the previous trends of a certain cryptocurrency that you want to invest your money in.
Different Ways to Earn APYs in Crypto
Though earning interest works on its own since it is a passive income, you still need to know where to put your investment. Passive income in crypto means putting an initial investment on something, doing little to nothing at all, and just waiting for your investment to grow.
The little effort that you can do is to find ways how you can earn APYs in crypto. The compound interest that you earned should maintain its value and purchasing power. You can use your crypto asset and compound interest as a store of value before you sell it to the market. Here are some of the different ways to earn APYs in crypto.
Crypto Lending and Borrowing
A long-term plan in crypto is better than a short-term plan especially if you really want to see the growth of your investment. In this plan, you can start lending your assets after gaining some interest. Crypto lending and borrowing are almost the same as the traditional ones, but with less paperwork. It can still go up depending on the demand.
- Crypto Borrowing
Crypto borrowing is a good way to prevent selling your cryptocurrency for emergency purposes only. Some platforms offer crypto borrowing where you can use your crypto as collateral. However, you have more amount of cryptos than the amount you’re borrowing. But do not worry, because if you can repay the loan on time and full payment, your collateral will go back to your account as well.
- Crypto Lending
If you want to borrow some cryptos, you have to go to certain platforms, too. It works hand-in-hand with crypto borrowing because you also need to offer some collateral. Your loan needs approval and you will receive the amount immediately. As a lender, you will gain APY interest periodically or depending on the agreement. Crypto lending also uses smart contracts to make transactions hassle-free and less stressful for both parties. Make sure to do your research before getting into crypto lending.
Yield farming means dynamically lending your assets to increase your cryptos and their interest. If you are a yield farmer, you are moving your cryptos around crypto markets to search for the highest yields. Yield farmers use this as a strategy to earn more from what they already have. If you are successful in doing this, you can easily and constantly trace your APYs. You can also be the first to know the highest yielding coins in the market
If you want to earn more interest with your coins, crypto staking can work for you. In crypto staking, you have to confirm the transactions done on a blockchain of a certain cryptocurrency. You can get your earnings on Proof of Stake (PoS). PoS helps an investor to secure their income from the work that they do. The more cryptocurrency you can offer, the more chances you being chosen as a block validator. It can affect the value of the coin because you have a limiting power of what comes out when.
To wrap up, APY in crypto can be a good way to gain higher interest in a passive way. You will invest in a certain cryptocurrency such as Bitcoin or Ethereum and then wait for it to grow. APY is more like a savings account in the crypto world.
Since this is an investment, there are still some risks that you have to be aware of, like inflation and the law of supply and demand. These things can alter the rates and the return of investments. But don’t worry because there are other ways of earning using APY, such as lending, borrowing, farming, and staking.