APR or APY: which indicator to choose when evaluating the profitability of crypto assets

When you are looking for a way to earn income from your cryptocurrency assets, you will inevitably face a choice between two main yield metrics — APR and APY. It may seem that the difference is just one letter, but in practice, these metrics can significantly impact your actual profits. Let’s understand how they differ and how to use this information when choosing an investment strategy.

Why investors often confuse these two metrics

Most newcomers to cryptocurrencies do not see the difference between APR and APY, perceiving them as synonyms. This is a dangerous misconception because these indicators are calculated using different formulas and reflect completely different pictures of profitability. Choosing the wrong metric when comparing investment opportunities can lead to missed profits or incorrect risk assessment.

The key difference lies in how they handle accrued interest. One metric considers it once a year, while the other continuously compounds it with the principal. This mechanism is called compounding, and it is what creates the difference between expected and actual returns.

APR — basic rate without complexity

Annual Percentage Rate (Annual Percentage Rate, APR) — this is the simplest form of calculating income. It shows what percentage of your investment you will receive over a year, without accounting for the fact that earned interest can be reinvested.

The formula is straightforward: APR = (annual income / principal) × 100%

For example, if you lend 1 BTC at 5% per annum, then the APR is 5%, and you will receive 0.05 BTC after a year. The calculation is done once — no further adjustments.

Where APR is used in crypto investments

On lending platforms, APR shows the simple interest rate on loans. For staking without automatic reinvestment, rewards are often also indicated as APR. This is convenient for quick comparison of basic offers when all conditions are the same.

Advantages of APR

• Easy to calculate mentally
• Transparent and understandable for any investor
• Good for comparing simple investments with identical conditions
• Does not require knowledge of compound interest formulas

Limitations of APR

• Often underestimates actual returns with frequent payouts
• Becomes inaccurate when comparing different reinvestment schemes
• Can be misleading if you plan to reinvest your income
• Does not account for interest-on-interest effects that can significantly increase total income

APY — real yield considering compounding

Annual Percentage Yield (Annual Percentage Yield, APY) — this is a more complex but significantly more accurate indicator. APY accounts for the effect of compounding, i.e., the fact that accrued interest generates interest again.

APY formula: APY = ((1 + r/n)^n×t) - 1

Where:

• r — nominal rate (as a decimal)
• n — number of compounding periods per year
• t — time in years

( Example calculation of APY

Suppose you invest )in a lending platform with an 8% annual rate and monthly interest accrual:

APY = ###(1 + 0.08/12)^12 - 1 ≈ 0.083 or 8.30%

See the difference? The nominal rate is 8%, but thanks to monthly compounding, the actual yield reaches 8.30%.

$1000 When APY becomes critical

In DeFi crypto farming, where rewards are automatically reinvested, APY provides an honest picture of how much you will actually earn. The same applies to savings accounts with daily interest accrual or complex staking schemes.

( Advantages of APY

• Reflects actual yield after all reinvestments
• Allows fair comparison of investments with different payout frequencies
• Helps avoid unpleasant surprises when calculating real profits
• Shows true annual income in 100% honest figures

) Limitations of APY

• Harder to calculate manually
• Requires understanding of financial math formulas
• Can cause confusion if the investor is not familiar with compounding
• Less intuitive for beginners

How interest accrual frequency affects the difference between APR and APY

The more frequently a platform pays interest, the greater the benefit from compounding. Consider two scenarios:

Monthly compounding ###6% nominal rate###: APY = ###(1 + 0.06/12)^12 - 1 ≈ 6.17%

Quarterly compounding (6% nominal rate): APY = ((1 + 0.06/4)^4 - 1 ≈ 6.14%

A difference of 0.03% may seem small, but it accumulates over large sums. And comparing daily compounding with annual can result in differences of whole percentage points.

Direct comparison: main differences

How to choose the right metric

Use APR if:

• The investment involves a simple scheme without reinvestment
• Rewards are received once a year
• You need a quick estimate of the basic rate
• All compared investments have the same payout frequency

Choose APY if:

• Rewards are accrued daily or monthly
• You plan to reinvest the earned income
• Comparing investments with different payout structures
• Engaged in DeFi crypto farming
• Want to know the true annual yield

Practical examples in crypto investments

Peer-to-peer loans. On P2P lending platforms, APR is often indicated because interest is accrued once at the end of the period. Here, APR fully reflects reality.

Staking with daily payouts. If you stake on a platform where rewards come daily, it’s important to look at APY to understand how much you will actually earn if you reinvest.

DeFi farming with automatic compounding. Many protocols automatically reinvest rewards. For such strategies, APY is the only honest indicator.

Cryptocurrency savings accounts. Platforms offer daily interest accrual. Without APY, you cannot honestly compare two different offers.

Why choosing the wrong metric can cost you money

Imagine choosing between two platforms: the first promises 12% APR with monthly compounding, the second — 11.5% APY with daily compounding. At first glance, the first seems better. But let’s calculate:

First platform: APY = )(1 + 0.12/12)^12 - 1 ≈ 12.68% Second platform: already given as 11.5%

On an amount of (000 over a year, the difference will be about $117. It’s not a triumph, but it’s not nothing either.

Main conclusion

APR and APY are not competing metrics but tools for different situations. APR is useful for quick assessment of the basic rate when all conditions are identical. APY is a fair tool for real income planning with modern compounding payout schemes.

Before investing a large sum, always convert the offered terms into a standard — preferably into APY. It takes five minutes but can save you from disappointment and help you choose the truly best investment. Remember: a number with a Y suffix usually reflects reality more honestly and fully than a number with an R suffix.