What is APY and why is it more important than APR for crypto investors

When you start investing in cryptocurrencies, you encounter many terms and metrics. Two of them—APY (Annual Percentage Yield) and APR (Annual Percentage Rate)—appear constantly, but not all investors understand the real difference between them. And it’s significant: choosing the wrong metric can cost you hundreds or even thousands of dollars per year.

The main difference is simple: APY is a financial metric that shows your actual annual income, taking into account that interest is compounded (this is called compound interest). APR, on the other hand, only considers the base interest rate, without accounting for the reinvestment effect. It sounds simple, but in practice, this difference can be substantial.

APY is not just a percentage—it’s the reality of your earnings

Annual Percentage Yield (APY) is a measure that reflects the actual income from an investment over a year if you reinvest the earned interest. That “if” is what makes APY so important for investors.

Imagine you invested $1,000 at 12% annual interest with monthly compounding. If it were a simple APR, you would earn exactly $120 over the year. But thanks to compound interest, in the first month, you earn interest on $1,000; in the second month, interest on $1,010 (the initial amount plus the first month’s interest), and so on. By the end of the year, your earnings will be higher than with simple interest.

The formula for calculating APY is: APY = (1 + r/n)^(n×t) - 1, where r is the nominal interest rate, n is the number of compounding periods per year, and t is the time in years. You don’t need to memorize this formula—what’s important is understanding the essence: the more frequently interest is compounded, the higher your effective yield.

Why APY provides a more honest picture than APR

The differences between these two metrics become clear in practice. APR (Annual Percentage Rate) is simply the annual interest rate without considering compound interest. It’s mainly used for fixed-rate loans with straightforward payments.

For example: two lending platforms offer you a 6% annual return. The first platform compounds interest monthly (which is effectively APY), while the second pays the entire interest once at the end of the year (which is APR). On the first platform, you’ll get about 6.17% due to compounding; on the second, exactly 6%. The difference is small but real.

Now, imagine long-term investments at a 10% rate with daily compounding. The actual APY will be about 10.52% instead of the nominal 10%. Over ten years, starting with $10,000, this difference can grow to several thousand dollars.

How to understand the differences in practical scenarios

Crypto staking often offers APY rather than APR. When you lock tokens into a staking pool, the rewards are usually automatically reinvested, creating a compounding effect. If a platform states 15% APY, it means that with continuous reinvestment, you will earn exactly that return.

Conversely, simple crypto lending sometimes operates on an APR model—you lend tokens, receive interest once at the end of the period, straightforward and transparent.

DeFi farming (crypto yield farming) is even more complex. Here, returns depend on the frequency of interest accrual, variable rates, and your willingness to reinvest earnings. In such cases, APY shows the real potential outcome if you actively manage your strategy.

How to properly calculate your earnings

The formula for practical APY calculation is simple. If you see an investment with a nominal rate of 8% compounded monthly:

• r = 0.08 (8% in decimal form)
• n = 12 (compounding periods per year)
• t = 1 (one year)

APY = (1 + 0.08/12)^12 - 1 ≈ 0.083 or 8.30%

The frequency of compounding is a key factor. Daily compounding yields more than monthly, which yields more than quarterly. When choosing between similar investments, pay attention to the compounding frequency.

When to use APY and when to use APR

When comparing investments, ask yourself three questions:

First, are earnings reinvested? If yes, and this happens frequently—use APY. If no, APR will be more honest.

Second, how often are interest payments made? Daily compounding requires calculation via APY. Annual payments can be evaluated with APR.

Third, what’s more important—simplicity or accuracy? APR is easier to understand; APY more accurately reflects reality.

In practice, for staking, savings accounts, and platforms with automatic reinvestment, use APY. For simple loans with a one-time interest payment at the end, APR is suitable.

Common mistakes investors make

Many beginners confuse APY and APR, thinking they are the same. As a result, they underestimate long-term earnings or overpay on loans.

Another mistake is ignoring the frequency of interest accrual. Two investments with the same nominal rate can yield different actual returns depending on how often interest is compounded.

A third mistake is forgetting that APY often “works both ways.” If you take a loan, the real rate is higher than the nominal. If you invest, your actual earnings are higher than the stated base rate.

Final guide for investors

Remember: APY is a metric that gives you the full picture of how much you will actually earn. It’s especially important for crypto investments, where automatic reinvestment and frequent interest payments are standard.

Before investing, always ask the platform to specify APY, not just APR. Compare APY figures, consider platform risks, and verify whether the promised rate is realistic.

Also, keep in mind that a high APY can hide high risk. Before putting money into staking or lending at 50% annual interest, ask yourself: why does the platform offer such a generous rate? The answer often lies in increased risk of losing your funds.

Use APY to make informed decisions, diversify your portfolio, and remember that small differences in returns can add up significantly over years of investing.