What is APY in crypto, and why should you learn about it before staking your crypto assets? Annual percentage yield (APY) in cryptocurrency refers to the compound interest earned on investing cryptocurrency in staking, farming, or similar investment. APY crypto is similar to traditional finance, which considers the compound interest earned on an asset instead of the simple interest. This guide explores the concept of APY and discusses the crypto investments with the highest APY today. You’ll also learn how to calculate APY, the concept of APR, and how to manage investment risks.
Understanding APY in Crypto
Understanding the concept of interest and yield is important to answer the question of “what is APY in crypto staking.”
Interest in crypto refers to the amount paid on a loan or money saved or invested in a platform. This is the simple interest generated on the original amount, not compounded over time.
Yield, or yield farming in crypto, refers to earning interest or other rewards by staking cryptocurrencies in a pool with others. The yield on a crypto investment is calculated as simple interest or as APY.
In APY, the interest is compounded and calculated for the given period, meaning the investor earns interest on the interests compounded over time. This gives APY the advantage over other forms of interest like APR and yield programs which return other benefits.
A high APY crypto investment benefits investors by offering the true value of interest earned on the original amount and allowing investors to maximize their investment within the same period. Investors get more of the crypto asset in high APY investments.
Top High-APY Cryptocurrency Investments
There are different types and platforms offering yield farms and other crypto investments. Some of the high-APY crypto investments are:
- Kraken: Kraken has over a dozen cryptocurrencies available for staking, with APY ranging between 4% - 2%. What is 7 day APY in crypto? Kraken has no minimum lockup period to earn rewards; stakers can liquidate anytime.
- Coinbase: With just six cryptocurrencies available, Coinbase offers a limited number of cryptos with high APY, typically over 6%. Coinbase stakers must typically have a minimum balance before staking.
- KuCoin: KuCoin has its native token, KCS, and others like ETH 2.0 for staking, with an APY of over 4.7%.
- Gemini: On Gemini, investors can pick from over 40 tokens to stake and earn around 4.55% APY. Popular cryptos staked on Gemini are Sol, MATIC, and ETH.
Some of these exchanges offer more APY but charge more trading fees, which may reduce the total profits. When staking, it is important to consider the lockup period, the available crypto for staking, the APY, the ease of liquidating your assets, and the security and integrity of the project.
How to calculate APY in crypto
By definition, APY is the rate of return for an investment compounded in a year. When considering what is APY and APR in crypto and how they are calculated, you’ll need these key parameters to calculate APY are:
- The interest rate is the interest earned on the initial capital or staked amount.
- The number of compounding periods is the number of times the interest compounds in a year.
- The number of compounding periods per year is the number of times the interest is compounded in a year.
The formula to calculate APY is:
APY = (1 + (Interest Rate / Number of Compounding Periods))^(Number of Compounding Periods per Year) - 1
If, for example, an investor locks up $100 worth of crypto investment that pays 7% interest daily over one year and compounds the interest, the APY would be calculated as:
APY = (1 + (0.07 / 365))^365 - 1
APY = (1.0001917808)^365 - 1
APY = 6.168%
N.B.: The formula assumes a constant interest rate and compounding period for the entire year, which may not be true in real-world situations. Therefore, the actual APY may be different from the calculated APY.
Risks and Limitations of Investing in Crypto with High APY
While a high-APY investment can grow your portfolio, there are associated risks to consider before investing. Some of these are:
- Risks of impermanent losses: market volatility can impact the value of cryptocurrencies. If the cryptocurrency price falls before maturation, the portfolio may temporarily lose value until the price rises again.
- Scams and fraud: some staking programs are scams and “rug pulls” designed to fleece people. These typically allow the founders to move the funds from the staking pool to a private address.
- Tax-reporting challenges: crypto taxes apply to certain types of crypto investments. Taxes may reduce the profits from investment.
High-APY investments are limited by market volatility and the absence of fraud protection. When investing in any high-APY program, ensure that you read the project white paper and understand the role of founders.
What is APR and APY in crypto? Market factors may influence the profit rate, so ensure you regularly monitor crypto APY rates.
What is the difference between APY and APR?
By now, you know a bit about “what is the difference between APR and APY in crypto.” APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are common terms for the interest rate paid on crypto investments. Although both terms are similar, there’s a key difference to know.
What is 7-day APY in crypto? There is also a way to calculate the annualized yield using a 7-day net price difference, calculated using the formula: APY = (end − beginning − weekly fees) / beginning × 365/7.
APR is the interest rate on an investment calculated for a year without compounding the capital and interest. In contrast, APY considers the compounding of interests and capital, essentially paying interest on previous interest.
Investments can thus have different APR and APY, but investments with higher APY will earn more interest despite having the same APR as other investments with lower APY. APY gives a better return than APR investments, and that’s why crypto investors are always on the lookout for high-APY investments.
If, for example, you invest $1,000 worth of cryptocurrency into two different staking platforms offering a base interest rate of 10%, with the latter having a high APY, the former may generate interest based on the interest rate. Still, the latter will always return more interest because of the higher APY.
This guide to what is an APY in crypto investment will help you understand how investing in crypto yields and returns. APY work based on compounding interests and returns more interest than APR investments. APY investments can quickly grow your trading capital but are also risky, largely due to market volatility. Volatility, security, and lock-up periods are important considerations if you invest in high-APY programs.
You can also stack cryptocurrencies through cryptocurrency hosting mining activities, an easy way to earn crypto without trading or staking.