WHAT IS APY IN CRYPTO ?

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💹 APY (Annual Percentage Yield) is the amount of money an investor will earn in a year if the money is reinvested after each accrual period. The calculation formula is compound interest. In cryptocurrencies and decentralised finance (DeFi), APY is used to express the returns users can get from staking, liquidity mining and other types of income farming.


📍 UNDERSTANDING APY CALCULATION

APY allows users to understand what annual returns they can expect from their investments, taking into account reinvestment of interest earned. This helps to compare different investment opportunities in cryptocurrency startups:

➡️ Comparing the returns of different cryptocurrencies in staking, income farming on one exchange.

➡️ Comparing the yield of staking one coin on different exchanges.

The rate, which is calculated using the simple interest formula, only takes into account the initial investment amount. In comparison, APY gives a more accurate idea of how much an investor will earn, taking into account the re-investment of interest

📍 THE APY CALCULATION FORMULA IS:



APY is the Annual Percentage Yield
r is the interest rate per period (in decimal form, e.g. 0.05 for 5%)
n is the number of times interest is compounded per year

For example, if an investment has an annual interest rate of 5% compounded quarterly, the APY would be:

APY = (1 + 0.05/4)^(4) - 1 = 5.127%

This means that over a year, the investment would earn an effective annual return of 5.127%, taking into account the compounding effect. Note that this formula assumes that the interest is compounded at the end of each period, which is often referred to as "compounding frequency". The more frequently interest is compounded, the higher the APY will be.


📍 THREE CRUCIAL POINTS TO KEEP IN MIND ARE:

1️⃣ Frequency of interest accrual. The more frequently interest is accrued, the higher the APY will be, even if the nominal interest rate remains the same.

2️⃣ Reinvestment. APY assumes that all interest earned is reinvested, which increases the total return.

3️⃣ Transparency. APY provides a more accurate representation of potential returns compared to a simple interest rate.

APY is a forecast and actual returns may vary. It may be affected by market volatility, changes in interest rates, risks associated with a particular investment product. APY is specified for each product and each coin separately, you can find this information on the website of the cryptocurrency exchange. To understand the amount of earnings, you need to know the period of accrual of income. For example, accrual in staking can occur both every minute and every day.

In addition to APY, there is another key rate to consider: APR (Annual Percentage Rate). Similar to APY, APR is a rate that measures the yield of an investment, but it is calculated using the simple interest formula. While APR is commonly associated with the cost of borrowing at an interest rate, it can also be applied to investments. Like APY, APR is not a fixed value, as it can fluctuate based on network activity and other factors.


📍 CONCLUSION

APY is a critical parameter that represents the return on an asset with compound interest, taking into account the reinvestment of profits after each accrual. This metric is essential when evaluating the feasibility of staking or other income-generating opportunities. For instance, it can help you decide whether to stake Coin A or convert it to Coin B and stake it instead. By comparing APY rates for different coins and staking options, you can make informed decisions about where to allocate your assets to maximize your returns.

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