APY and APR in crypto: everything you need to know about actual investment returns

APY – it’s not just a number, but real money in your wallet

The cryptocurrency market has long ceased to be just a place for speculation on volatility. Today, it is an ecosystem where everyone can earn passively: holding coins in staking, providing liquidity in DeFi, or placing funds on crypto exchanges through savings products. But here’s the problem – half of the investors do not fully understand what exactly they are counting on when they see an attractive percentage next to an investment offer.

This is where the main question arises: is it APY or APR? Because choosing between them can cost you hundreds or even thousands of dollars in annual returns.

Why APY is not just a bigger number than APR

APY (Annual Percentage Yield) – is the annual percentage return that shows how much you actually earn in a year, considering that your interest will work for you again and again.

APR (Annual Percentage Rate) – is simply the basic annual rate. It does not account for any magic of compounding.

What does this mean in practice? Imagine:

• 10% APR means: you invested $1000, after a year you get $100 the income(. Total $1100. That’s it.
• 10% APY with daily compounding means: your money works every day, interest is added to the amount, and the next day this increased sum already earns more. After a year, you will get about $105.16, and your capital will be $1105.16.

The difference of $5.16 may sound unimpressive, but on larger sums and longer periods, this difference becomes exponential.

How compound interest works: formula and examples

The APY formula looks like this:

APY = )(1 + r/n)^n – 1(

Where:

• r = nominal rate )APR( as a decimal
• n = number of compounding periods per year

If compounding occurs daily, then n=365. If hourly – n=8760.

Specific example: you see a staking offer with 5% annual interest and daily compounding.

APY = )(1 + 0.05/365)^365 – 1 ≈ 0.05127, or 5.127%

It might seem that 0.127% difference is trivial. But on $10,000, that’s already $12.70 extra per year. And if you invest $100,000 – that’s already $127 per year(. Over a long horizon )3-5 years( with reinvestment, this difference grows non-linearly.

Table: how APY grows with different rates )daily compounding(

See the pattern? The higher the base rate, the bigger the “bonus” from compounding.

Where in crypto APY appears: staking, DeFi, exchanges

( PoS coin staking

In blockchains like Ethereum )after Merge(, Cardano, Solana, Polkadot, rewards for transaction validation are expressed in APY. Why? Because rewards are often automatically added to your stake )this is called restaking###, and immediately start earning new rewards.

APY in staking depends on:

• New coin issuance – how many the network creates
• Total staked volume – if many people stake one coin, each share is smaller
• Validator fees – if you stake via a pool, the validator takes its percentage
• Lock-up period – the longer you are willing to freeze coins, the higher the APY can be

( Savings products on exchanges

Crypto exchanges allow placing funds in two formats:

Flexible accounts )Flexible(: deposit and withdraw anytime, but APY is lower )usually 2-5% on popular coins(.

Fixed accounts )Locked(: lock funds for 7, 30, 60, or 90 days, receive a higher APY )sometimes up to 10-15% and above###. Capitalization occurs daily or at the end of the period.

( DeFi: liquidity pools and lending protocols

Here the picture is more complex:

Supply APY – income you get by providing your crypto to a pool for borrowers. The higher the demand for loans – the higher the liquidity provider’s income. Capitalization happens literally with each new block.

Borrow APR – rate for borrowers )usually APR is shown to make the numbers look lower(. If interest is reinvested, it can be converted into APY.

Yield farming – when you skillfully move funds between pools in search of maximum returns. Here, APY can be astronomical )100%, 500%, 1000%(, but risks are colossal.

How to choose: correctly compare APY of different platforms

Rule 1: always compare APY, not APR. If the platform only shows APR – ask about the frequency of compounding.

Rule 2: with equal APR, choose more frequent compounding. Daily is always better than monthly.

Rule 3: remember about fees. A high APY can be eaten up by withdrawal or management fees. Always check the fine print.

Rule 4: ultra-high APY )500%+( – are either young projects with huge risks or temporary promos. Don’t expect them to last long.

Rule 5: platform reputation is more valuable than percentages. Better to earn 5% on a reputable exchange than lose everything on an unknown platform promising 50%.

APY calculator: what to input

Don’t want to do manual calculations? Use online calculators )available on almost all exchanges(.

You need to enter:

1. Initial amount – how much you invest
2. APR – the nominal rate offered
3. Investment period – for how long )1 year, 3 years, 5 years(
4. Compounding frequency – daily, weekly, monthly
5. **)Optional( additional contributions – if you plan to top up regularly

The calculator will show:

• Actual APY
• Final amount after the period
• Total earned income

Example: $1000, 10% APR, daily compounding, 1 year = APY 10.516% = final amount $1105.16.

Common mistakes when choosing an APY product

❌ Mistake 1: falling for APR instead of APY. At first glance, 12% APR looks good, but if compounding is monthly, the actual APY will be 12.68%.

❌ Mistake 2: ignoring the volatility of the underlying asset. You earned 10% on a coin that dropped 40% – the final loss in dollars.

❌ Mistake 3: forgetting about taxes. In most countries, crypto income is taxed, and this must be considered in calculations.

❌ Mistake 4: putting all funds into one product. Even with high APY – diversify risk.

❌ Mistake 5: thinking that high APY = high risk. Sometimes it’s true, but not always. Do your own research )DYOR(.

Why for a long-term investor, APY is the holy grail

If you plan to hold crypto for 3, 5, or 10 years, the effect of compound interest fully reveals itself. Imagine: you invest $10,000 at 8% APY with annual compounding.

In 10 years: $21,589 )income $11,589(.

At 8% APR without compounding: $18,000 )income $8,000(.

The difference – $3,589 – is “free” money you get just because you understood the mechanics of APY.

Final checklist before investing

✓ Make sure it’s APY, not APR ✓ Check the compounding frequency ✓ Find out all fees )withdrawal, management, entry( ✓ Read the terms about fund lock-up ✓ Assess the platform’s reputation )reviews, security audits( ✓ Calculate real income in fiat currency )dollars/euros ✓ Consider taxes in your jurisdiction ✓ Diversify – don’t put everything into one product ✓ Remember the risk of asset volatility ✓ Conduct your own research before investing

APY is not a magic number that guarantees profit. It’s a tool for assessing real returns. Use it correctly, and your crypto investments will work more effectively for you.