What Does APY Mean in Crypto?
APY or annual percentage yield is the rate of return on an investment in a year, factoring in the compounding interest. Find out what it means in crypto.
Published April 8, 2022.
What Does APY Mean?
Annual Percentage Yield (APY) is the rate of return on an investment in a year, factoring in the compounding interest. Compound interest is the interest you earn on your interest—not just on the deposited amount.
What is APY in Crypto?
APY calculates all of your returns in a year, including the compounding interest, but Annual Percentage Rate (APR) excludes compound interest from the equation. For example, if you get a 10% APY from shorting Ethereum with $1,000, you'll end up with $1,105 after a year. With 10% APR, you'll have exactly $1,100.
How to Calculate APY in Crypto
APY= (1 + r/n )^n – 1
Where "r" is the interest rate and "n" is the number of compounding periods.
Compound interest accrues on both the initial principal and the accumulated interest from previous periods—therefore, you generate interest on the interest. Compounding crypto helps you beat the market volatility to an extent.
Let's take a simple example of how you can calculate your APY. If you're staking on Binance, and the compounding period is daily (accounting for 365 days in a year), while your interest rate is 10%, you'll have to calculate the following equation:
(1 + 0.10/365)^365 - 1
After calculating this, you'll end up with 0.1051, which means that you'll have a 10.51% return on your investment after a year, which is higher than the original 10%.
What Is a Good APY in Crypto?
APY calculation can vary across different platforms and pools. For example, a 7-day APY scheme is based on the fund’s average weekly distribution. Generally, native cryptocurrencies and emerging tokens have higher APYs than stablecoins, owing to the risk element. This return is given with the 7-day annualized yield formula, which measures the yearly rate based on the earnings over a 7-day period. Namely, the 7-day APY is calculated with the following formula:
((A-B-C)/B) x 365/7
A = the price of the asset at the end of the 7-day period B = the price at the beginning of the 7-day period C = the fees during the timeframe
Bitcoin APY and Ethereum APY can be low, whereas a new token can give APY up to 1,000%. But it's important to note that APYs can be fixed or dynamic. Dynamic APY reduces over time as the number of stakers increases. The APY asset is prone to market volatility as well.
In essence, there's no ideal APY in the crypto market. It depends on the asset, method of profit generation, and your risk appetite.
How Should You Use APY in Crypto?
APY is widely used across the crypto and traditional markets to give a clear idea about the potential returns on your holdings. CEXs, DEXs, lending and borrowing platforms, insurance protocols, launchpads, and derivatives platforms are places where you can start earning APY on crypto.
Rather than leaving your digital assets in the wallet to collect dust, you can stake or deposit them. The platforms make better use of the assets and share the profit generated with you at regular intervals.
APY helps you compare the returns on different platforms accurately. Keep in mind that APY isn't only given for staking and lending. You could also get a solid APY from trading crypto algorithmically, so consider researching it and seeing if it's right for you.