APR is the rate of return that cryptocurrency investors need to know

APR is a fundamental concept in investing and borrowing. Whether you choose to deposit funds or borrow money, understanding APR and APY is crucial because your returns depend on selecting the right metric and accurate calculations. In the era of increasing crypto investment tools, you’ll find APR and APY everywhere, and a deep understanding of their differences will help you maximize profits effectively.

Basic Differences: What Are APR vs. APY?

APR (Annual Percentage Rate) is the annual interest rate that does not consider compounding. It means interest is calculated only on the principal. If you invest 100 units at an APR of 5% per year, you’ll earn 5 units after one year. The APR figure excludes hidden fees and provides a straightforward way to estimate returns.

APY (Annual Percentage Yield) accounts for compounding. It means interest is calculated on the principal plus accumulated interest. This is “interest on interest,” resulting in a higher final return than APR.

The main difference: APR does not include compounding, while APY does. The more frequently interest is compounded (daily instead of monthly), the higher the return.

How to Calculate Rates: Formulas and Examples in Digital Assets

Calculating APR is straightforward:

APR = P × T

where:

• P = interest rate per period (percentage)
• T = investment duration in years

If you invest 10 Bitcoin at an APR of 6% per year, the return will be:

• P = 6% × T = 1 year = 6%
• So, after 1 year, you will have 10.6 BTC.

If APR is a monthly percentage, like 0.5% per month, the calculation remains the same:

• P = 0.5% × 12 months = 6%

Calculating APY is more complex:

APY = (1 + r/n)ⁿ - 1

where:

• r = annual interest rate (decimal)
• n = number of compounding periods per year

Different compounding frequencies yield different returns for the same rate:

• Semi-annual compounding → APY approx. 6.09%
• Quarterly → APY approx. 6.14%
• Monthly → APY approx. 6.17%
• Weekly → APY approx. 6.18%
• Daily → APY approx. 6.18%

Note that daily compounding yields the highest return, and the difference between APR and APY is significant for long-term investments.

Staking and Yield Farming: Applying APR and APY

In crypto, APR represents the interest earned from staking or lending digital assets over a year. The reward is paid in the same digital currency.

Staking is a passive investment method where you “lock” your coins to support the network and validate transactions. You earn interest as a reward. For example, staking 1 Ethereum at an APR of 24% for one year yields an additional 0.24 ETH, totaling 1.24 ETH.

Yield Farming is an advanced strategy where you deposit digital assets into liquidity pools via decentralized applications (DeFi). You provide liquidity to platforms and earn higher rewards or dividends than standard staking.

The difference between staking at 6% APR and APY at 6%:

• Using APR with daily compounding results in an APY of about 6.18%
• Daily compounding adds approximately 0.18% to your investment value
• For large principal amounts, this difference can be substantial

Choosing APR or APY: A Guide for Crypto Investors

When is APR most appropriate?

APR is ideal if you’re a borrower, as it’s lower and indicates less interest paid. It’s also useful for short-term loans (a few months) where compounding has minimal impact.

When is APY most suitable?

APY is better for investors or lenders, as it reflects the actual return, especially over the long term (multiple years). The effect of compounding becomes more significant over time.

Comparison example:

Suppose you have 10,000 units and invest in an account offering 5% per year:

• Using APR: After 3 years, you earn 1,500 units (500 × 3)
• Using APY (compounded annually): After 3 years, you earn approximately 1,576.25 units
• Difference: about 76.25 units or 5% more than APR

For larger amounts or longer periods, this difference grows more pronounced.

Risk Warning

Crypto yields are often much higher than traditional financial markets. However, risks are also higher. If you see yield farming with an APY of 200%, be cautious. Extremely high returns can be a sign of unstable or scam projects. Always research the platform and project viability before investing.

Summary: APR is a Tool You Must Know

APR is an unavoidable part of investment language, and APY is equally important. Both are used in investing, borrowing, credit cards, and other financial instruments.

In crypto, passive investment tools like staking and yield farming are built around APR and APY as key indicators.

Remember:

• If you’re a borrower, look for the lowest APR
• If you’re an investor, seek the highest APY
• Always check the platform’s risk and credibility before investing

By deeply understanding APR and APY, you can choose the most suitable crypto investment products and maximize your gains.