Choosing between APR and APY for crypto investments: which metric to use

When it comes to crypto investment returns, investors often encounter two key metrics — APR and APY. Both are used when evaluating staking, lending, and farming, but it’s important to understand that what is APR — is not the same as APY. The first considers only simple interest, while the second accounts for the effect of compound interest, which can significantly differ when calculating actual returns. In this article, we’ll explore how to correctly interpret these indicators and choose the appropriate metric for your goals.

Why it’s critically important for investors to distinguish these metrics

To make optimal investment decisions in the cryptocurrency space, you need to clearly understand how APR and APY differ. Both metrics describe annual returns but are calculated fundamentally differently and yield different results, especially when it comes to investments with reinvested profits.

Ignoring this difference means risking underestimating or overestimating the real income from your investments. Choosing the wrong metric could cause you to miss out on a more profitable offer or, conversely, select a less attractive option. Therefore, understanding the essence of each indicator is fundamental to financial literacy in the crypto realm.

What is APR (annual percentage rate)

What is APR — is a basic, most straightforward metric that expresses the annual percentage of the investment amount without considering the reinvestment effect. APR shows the nominal annual rate and is calculated as simple interest — once per year on the initial amount.

This metric is widely used in the crypto industry to describe the returns on loans, staking, and other investment instruments. Its main advantage is universality and ease of comparison: you see exactly what you will receive in a straightforward form without complications.

How APR is calculated in practice

For cryptocurrency loans, the formula is simple:

APR = (annual interest income / initial amount) × 100

Suppose you lend 1 BTC at 5% per annum. Your annual income will be 0.05 BTC, which corresponds to a 5% APR.

In staking, the calculation is similar:

APR = (total annual rewards / staked token volume) × 100

If you stake 100 tokens with an offer of 10% APR, after a year you will receive an additional 10 tokens as income.

Key point: APR does not assume that you will reinvest the earned interest. It’s simply a base on which other calculations are built.

Strengths and weaknesses of APR

Advantages:

• Easy to calculate and intuitively understandable even for beginners
• Standardized format allows quick comparison of different lending offers
• Transparently shows the basic rate without marketing manipulations

Disadvantages:

• Ignores the effect of compound interest, leading to underestimation of actual returns with frequent reinvestment
• Ineffective for comparing investments with different compounding frequencies
• Can mislead investors unfamiliar with the difference between simple and compound interest

What does APY (annual percentage yield)

APY — is a more advanced metric that reflects the actual return considering compound interest. While APR shows the nominal rate, APY shows the effective rate you will get if all earned interest is reinvested.

Compound interest is a process where interest is accrued not only on the initial capital but also on previously accumulated interest. This creates a “snowball” effect, where your income grows exponentially rather than linearly.

How APY is calculated

The APY formula looks like this:

APY = ((1 + r/n)^n×t) - 1

Where:

• r — nominal rate (in decimal form)
• n — number of reinvestment periods per year
• t — time in years

Suppose you invest (in a lending platform with an 8% rate compounded monthly:

APY = )(1 + 0.08/12)^12×1$1000 - 1 ≈ 0.0830 or 8.30%

See the difference? With monthly compounding, the effective return is 8.30%, not 8%. This difference increases with higher compounding frequency.

( Impact of compounding frequency on APY

The frequency with which interest is compounded significantly influences the final APY. The more often — the higher the effective result.

Compare two platforms with the same base rate of 6%:

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

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

The difference is small, but over large volumes and long investment periods, it can amount to thousands of dollars in favor of the platform with more frequent compounding.

) Pros and cons of APY

Advantages:

• Reflects the actual, real-world return considering all factors
• Allows fair comparison of investments with different payout schedules
• Helps set realistic expectations for long-term investments

Disadvantages:

• The formula is more complex, requiring understanding of financial mathematics
• Some investors confuse APY with a simple rate
• Less intuitive for beginners compared to APR

Main differences between these indicators

When to use APR, and when APY

Choose APR if:

• You’re considering a loan with a fixed rate and do not plan to reinvest income
• Comparing two offers with identical payout structures
• Want to understand the basic, nominal rate without complications

Use APY if:

• Income is automatically reinvested into the protocol ###as in most DeFi staking(
• You need to compare options with different interest compounding frequencies
• You’re looking for a realistic estimate of long-term profitability

In practice:

• For short-term crypto loans: focus on APR
• For staking without reinvestment: use APR
• For crypto savings accounts with automatic reinvestment: calculate using APY
• For DeFi farming strategies: APY provides an accurate result

Real-world comparison examples

Scenario 1: Simple lending A platform offers 7% APR for a loan. You lend $10,000. The annual income is $700, regardless of reinvestment. Here, APR fully describes the situation.

Scenario 2: Staking with monthly payout A protocol offers 12% APR with staking. If you reinvest rewards monthly, the actual annual return will be closer to 12.68% APY. Just looking at 12% would be a mistake.

Scenario 3: Choosing between two platforms

• Platform A: 8% annual rate, daily compounding → APY ≈ 8.33%
• Platform B: 8% annual rate, quarterly compounding → APY ≈ 8.24%

All else being equal, Platform A is more advantageous, even though the base rate is the same.

Frequently asked questions

What does 10% APR mean in crypto? It means that for every )investment, you will earn ( in interest over a year without reinvestment. This metric is used in loans and staking without automatic reinvestment.

Can APY be lower than APR? No, APY is always greater than or equal to APR )if reinvestment is involved###. APY cannot be lower because compound interest only increases income.

Which is better to choose? There’s no universal answer. It depends on the specific investment structure. Both metrics are important; just use them in the right context.

Is a high APR always good? Not necessarily. A high rate may signal increased risk, platform instability, or unrealistic promises. Always verify the reputation and reliability of the income source before investing.

Final recommendations

The difference between APR and APY is not just an academic topic. In real practice, it can impact your earnings by thousands or even millions of rubles on large investments.

What is APR — is a starting point, a basic understanding. But for making informed financial decisions, it’s necessary to go further and calculate using APY if reinvestment is involved.

Before investing, always clarify:

• Which metric the platform uses
• How often interest is paid
• Whether reinvestment is possible
• What are the actual risks

Armed with this knowledge, you will be able to evaluate crypto investments more objectively and choose the most profitable options among many offers on the market.