Let’s learn more about APY & APR
What is APY?
The Annual Percentage Yield, or APY, is a metric for calculating the annual return on an interest-bearing account. The rate of return on an investment in cryptocurrency is known as the APY.
As APR only includes ordinary interest while calculating interest, APY includes compound interest for calculating return that is why APY is more lucrative than the APR.
Formula: APY = (1 + Nominal Interest Rate/No. of compounding period per year)ˆNumber of periods – 1
What is APR?
When lending their cryptocurrency or making it accessible for loans, investors can expect to earn an interest rate in the form of a percentage known as the annual percentage rate (APR). It takes into account additional fees that a borrower must pay but excludes compound interest.
Formula: APR = (interest rate per compounding period X number of periods in a year)
Let me explain this with an example
For example, if a user puts $10,000 into an account with a 2% annual percentage yield (APY), the user will receive $200 in interest after a year.
Due to the fact that APR does not account for compound interest, if a user made an investment with an APR of 2%, the user would only receive $160.67 in interest.
Difference between APR & APY
When calculating & comparing returns for APR and APY, compounding is the only difference. APY will always result in a bigger overall sum, all other factors being equal (i.e., original investment, interest rate mentioned, and time duration of investing).
In real terms, it means that users must use APR while borrowing money and invest in APY rates to increase their overall earnings.
APY is better than APR for crypto users earning higher returns in return for providing liquidity on crypto exchanges.
Which one is better
In general, annual percentage yield (APY) is a better indicator of the interest earned on a cryptocurrency investment over a year.
APR can still be helpful in some circumstances, though. APR can be used, for instance, to compare the interest rates of various investments.
It’s crucial to examine APY rates on various loan services if you want to earn interest on your cryptocurrency. Finding the platform that delivers the most return on your investment will be made easier thanks to this.