Cryptocurrency investing offers high annual percentage yield (APY) through DeFi services and exchanges, surpassing traditional bank rates.
But what’s the difference between Annual Percentage Yield and APR? How does APY work in crypto, and are the stated returns accurate?
This guide explains it all.
What is APY?
Annual percentage yield, or APY, represents the actual rate of return achieved on an investment.
It takes into account the effect of compounding interest.
Periodically, compound interest automatically adds to the principal balance, increasing the total amount of earned interest.
Over time this results in greater returns than APR because the total deposit invested increases.
Why Do Some Platforms Use APR and Some Use APY?
Banks, financial institutions, and crypto platforms use APR and APY interchangeably to lure borrowers and lenders.
Borrowing services advertise lower APR to seem less costly, hiding the impact of compound interest.
Lenders promote higher APY to entice investors, but some crypto platforms don’t automatically compound interest, requiring manual intervention for optimal returns.
How APY Works for Crypto
In crypto, APY is calculated based on the supplied assets, not their dollar value.
For instance, with a 5% APY and 1 Bitcoin deposited, you’d earn 0.05 BTC as interest, regardless of Bitcoin’s value.
This unique approach can make crypto Annual Percentage Yield more appealing than traditional investments.
However, impermanent loss is a consideration, especially in high APY liquidity pools, where temporary losses might occur.
Despite this, if the interest gained outweighs the loss, it remains a worthwhile investment.
What to Expect in Returns for Crypto
In crypto, returns are based on supplied assets, offering high returns if the asset value increases with compounding interest.
Decentralized Finance (DeFi) services often start with high APYs, attracting users, but rates decrease as more assets are added.
Centralized services like Crypto Earn can also lower rates but follow regulations.
Typically, crypto exchange returns range from 2-15%, with stablecoins at the higher end and popular assets like Bitcoin at the lower end.
DeFi liquidity pools can offer much higher rates, but they drop as more users join.
Expect higher returns than traditional savings but be cautious of unsustainable, extremely high rates in the long term.