How to understand APY in crypto and choose the right yield indicator

When you start investing in cryptocurrencies, you immediately encounter two mysterious abbreviations — APR and APY. At first glance, they seem similar, but in fact, they are different tools for assessing returns, and each operates according to its own rules. Understanding the differences between them can significantly change your results in staking, lending, and other crypto strategies.

Why is this important: a brief overview

Many newcomers to crypto overlook this topic and later wonder why promised 10% annual yields turn out to be something entirely different. The fact is, APR and APY are calculated differently, and on larger sums, this difference can be quite substantial. By understanding the distinctions between these indicators, you can realistically assess potential profits and choose the optimal strategy according to your goals and risks.

What is APY in crypto: a full explanation

APY in crypto is — the annual percentage yield that accounts for the effect of compound interest (compounding). This is a key difference from APR.

The annual percentage yield (APY) shows the actual annual income you will receive if your interest is constantly reinvested. The formula looks like this:

APY = ((1 + r/n)^n*t) - 1

Where r — nominal rate, n — number of compounding periods per year, t — time in years.

Practical example: investing $1000 at 8% with monthly interest accrual: APY = ((1 + 0.08/12)^12*1) - 1 ≈ 8.30%

See the difference? With a simple 8%, you’d get $80, but with compounding, it’s $83.

What is APR and how is it calculated

APR (annual percentage rate) — is a simple annual rate without considering reinvestment of interest. It is calculated as:

APR = (interest earned over a year / principal) × 100

If you lend 1 BTC at 5% per year, your APR will be exactly 5%. End of story. Nothing more is added; interest on interest is not considered.

( Where APR is encountered in practice

On lending platforms: you lend crypto assets, and the platform pays you interest once at the end of the period or in equal parts, but without reinvestment.

For staking without compounding: you receive rewards, but they are not automatically added to the staking pool.

Comparative analysis: APR vs APY

) Key difference illustrated

A platform offers 6% per year. With monthly accrual:

• APR remains 6% — this is just the annual rate
• APY will be ≈6.17% — what you actually get

The difference is small at low rates, but at 12% per year, it grows to about 1%, which is significant.

When to use each indicator

( Choose APR when:

1. You evaluate short-term loans with a fixed payment structure
2. You need a quick and simple comparison of two investments with the same payout frequency
3. Rewards are not automatically reinvested

Example: you take a loan to buy equipment at 5% per year with annual payments — APR fully describes your actual cost.

) Choose APY when:

1. Interest is accrued frequently ###daily, weekly, monthly###
2. You consider platforms with automatic reinvestment
3. You engage in DeFi farming where rewards are constantly reinvested

Example: you stake tokens on a platform where rewards are automatically added to your pool daily — use APY to estimate actual profitability.

Real-world scenarios: where this applies

Crypto savings accounts with daily accrual: use APY. With 5% APY compounded daily, you will earn much more than with simple 5% APR.

Long-term lending: if you lend crypto assets for a year at a fixed rate without reinvestment, APR will give you the full picture.

Automatic crypto farming: platforms that reinvest rewards themselves should show APY. If only APR is shown — be cautious, the actual income will be higher than stated.

Common investor mistakes

1. Confusing APR and APY — see 12% APY and think it’s 12% simple interest, then wonder why income is higher
2. Ignoring accrual frequency — daily accrual at 5% yields different results than annual
3. Relying solely on numbers — high APR/APY can hide high risks of an unstable platform
4. Not considering fees — a platform may claim 10% APY, but after fees, it remains 7%

Practical tips for investors

• When comparing two options, make sure both are expressed using the same indicator ###both APR or both APY###
• If only APR is offered but rewards accrue frequently, calculate APY yourself using the formula
• Check the platform’s reputation before investing — a high percentage isn’t worth risks on an unreliable service
• Study the detailed terms — they often specify how rewards are accrued

Conclusion

Understanding the differences between APR and APY is not just theory; it’s a practical skill that affects your actual income. APR shows a simple annual rate, while APY accounts for the effect of compound interest and provides a more honest picture of your profitability. The choice between them depends on the specific situation: the type of investment, payout frequency, and your goals. Make informed decisions, study platform conditions, and remember that a high percentage always comes with corresponding risks.