APY vs APR: Which should an investor choose

The jargon of the cryptocurrency market is full of abbreviations that confuse newcomers. APY and APR are two of the most commonly encountered, but many confuse their purpose. However, the difference between them is critical for calculating the actual return on your assets.

What is APR and why it’s not the full picture

Annual Percentage Rate (APR) is a basic indicator of annual income. Imagine you invest $10 000 at an APR of 20%. Simple math shows that after a year, you will get $2 000 percent, totaling $12 000.

Sounds simple? But here’s the catch: APR assumes that interest is accrued once a year. In reality, financial institutions and DeFi protocols accrue income much more frequently — monthly, weekly, or even daily. And that’s where the magic of compound interest begins.

Compound interest: when interest earns interest

The essence of compound interest is simple: you earn interest not only on the initial deposit but also on the already accrued interest. Each new accrual is added to the principal, which then works for you even more actively.

Let’s revisit the example with $10 000 and an APR of 20%, but now interest is accrued monthly. After a year, you will have not $12 000, but $12 429. The net profit from compound interest is $429.

If interest is accrued daily, the amount will grow to $12 452. A small difference at first glance? Wait until years pass.

Over three years with daily accrual at the same APR of 20%, your deposit will turn into $19 309. That’s a full $3 309 more than with simple APR without compound interest ($16 000). That’s why the frequency of accrual matters.

APY: the true indicator of income

Annual Percentage Yield (APY) is what you really need to know. APY already includes the effect of compound interest, so it shows the actual income over a year.

The same 20% APR with monthly accrual corresponds to a 21.94% APY. With daily accrual, APY is 22.13%. These figures reflect the actual annual earnings, accounting for all intermediate accruals.

Remember the key difference:

• APR — a fixed rate that does not change and does not account for accrual frequency
• APY — a dynamic indicator that reflects the real profitability of your capital

How to properly compare crypto products

When choosing between different DeFi solutions and staking, always normalize the figures. Never compare the APR of one product with the APY of another — it’s like comparing apples to oranges.

Two products with the same APR of 15% can yield different results if one accrues interest monthly and the other daily. Daily accrual is always more advantageous due to more frequent compounding.

Another important point: in the crypto sphere, APY often means rewards in cryptocurrency rather than fiat currency. If the asset’s price drops, the value of your investments in dollar equivalents will also decrease, even if you continue to receive crypto interest. Always study the product’s terms and understand exactly what you are receiving.

Practical advice for investors

When evaluating potential earnings, always ask for APY, not APR. If only APR is offered, calculate the APY yourself using the accrual frequency. The more frequently interest is accrued, the higher the actual return on your deposit or staking.

Remember: due to compound interest, APY is always higher than APR when accruals happen more than once a year. Use this difference to your advantage when choosing investment products on decentralized finance platforms.

Risk disclaimer: This material is provided for educational purposes and is not financial advice. Crypto assets are highly volatile, and the value of your investments can both increase and decrease. All investment decisions are made at your own risk and responsibility. Make sure you understand the full spectrum of risks before investing.