Things to Know About Annual Percentage Yield (APY) in Crypto

To reckon the growth of any investment or company, analysts use various metrics. Most of them help in evaluating the growth during a certain period. Annual Percentage Yield (APY) has become a widely used parameter to gauge the performance of digital assets. As the name suggests, it reveals information about the overall play of crypto on a yearly basis. 

In the past few years, the usage of this metric has largely increased. The special thing about this parameter is that it’s not just for experts. Even new investors with little experience in trading can use it. That’s probably the biggest reason behind its full-scale adoption. However, there are many interesting facts that one can learn about this method. So let’s dig deeper and find out what APY is all about.

Exploring APY and its Possibilities

APY has emerged as the go-to method for those who like to earn passive income. In simple words, it’s the calculation of the interest accumulation over one year. However, it takes a broader approach and reckons the profits gained from the market too. Using this method, investors can surmise how much interest they’ll pocket. 

They can compare the possibilities of earning income from their investments. Importantly, they can take different scenarios and then figure out the amount. Many other interest rates don’t factor in the effects of compounding, but APY takes these into account. In essence, it is the anticipated annual return rate on a deposit. 

It also determines how much compound interest one gets. As the rate goes up, the balance also increases in its value. The new investors who’ve just started to do calculations must keep a few things in mind. They must know that compounding interests itself is measuring the return earned by investments. 

It differs from simple interest that can only be earned on the principal amount. On the other hand, compound interest considers the amount earned by the principal amount along with the interest earned. CI becomes a source of earning passive income to the account holders. Its close association with APY makes it more interesting to learn about.

Learning to Calculate APY

There’s a common formula that people can use for measuring the APY. It is usually implemented in finances in the event of the nominal interest rate being constant. However, the method of calculation involves the number of compounding periods and the nominal interest rate. 

Nominal Interest Rate- It is calculated before ascertaining the inflation.

Compounding Period- It is the quintessential gap between the two periods of calculating CI. That’s the duration from which interest gets compounded till the next time it’s compounded. Annual compounding is doing it in a year i.e. daily, monthly or any other period. 

The formula for calculating APY:

APY= (1+ (r/n))n-1

APY- annual percentage yield

R- nominal interest rate

N- Number of compounding periods

For instance, Mr. X deposits $10,000 in a savings account with a simple yearly interest rate of 6%. As per the simple interest calculation, Mr. X gets $10,600 annually. In another hypothetical scenario, let’s assume that the bank calculates and pays interest monthly. In that case, the bank adds interest every month and with the APY calculation, the amount is $10,616.78.  

The difference may seem very paltry but it makes a big difference in the long run. 

Distinguishing Between APY and APR

Many people get confused between annual percentage yield (APY) and annual percentage rate (APR). The difference might seem to pertain to just one word, but they are quite dissimilar. In simple words, only APY takes compounding into account and APR doesn’t. APY is mostly associated with long-term investments. APR, on the contrary, is mostly applied for short-term investments.

Sneak-Peek into Crypto APY

Even though the concept of APY is older than crypto, it is implemented different;y differently in the crypto space.  In the case of the US dollar, APY will be calculated on the dollar value of the assets. In the case of crypto, it would be calculated on the amount of investment they’ve made.

Furthermore, users should know other ways of making potential passive income. One of them is yield farming which generates extra coins without being actively involved in the process. Crypto staking is another way of generating passive income. It is possible only in a proof-of-stake blockchain that generates new tokens by validating transactions.

Also, they can try becoming a liquidity provider or lending crypto for the same purpose. They should know the factors that impact the crypto APY. Things like inflation, token supply and demand, and compounding periods, can make a big difference. New traders should consider taking the help of professionals in doing the math. 

Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages ​​and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.