APY in Cryptocurrencies: How to Properly Assess Investment Returns

Anyone who begins investing in crypto assets will sooner or later encounter two mysterious abbreviations — APR and APY. These indicators are everywhere: on lending platforms, in staking programs, in DeFi offers. But here’s the problem — investors often don’t understand how they differ and choose investments based only on the number, not realizing that one metric can be significantly higher than the other under the same conditions. This can lead to an incorrect assessment of potential profits and, consequently, disappointment. Let’s clarify what APY means in cryptocurrencies and how to properly compare these metrics to make more informed investment decisions.

Two yield metrics — what’s the difference between APR and APY

At first glance, it seems that APR and APY are the same. Both are expressed as percentages and used to describe annual returns. But in reality, they are completely different metrics that can lead to fundamentally different results, especially for long-term investments.

APR (Annual Percentage Rate) is a simple annual interest rate. It shows what percentage you will earn on your initial investment over a year, without accounting for reinvestment of earned income. Imagine depositing money into an account and doing nothing else — that’s APR.

APY (Annual Percentage Yield) is something entirely different. This metric accounts for the effect of compound interest, meaning that your earnings are automatically reinvested and start generating additional income. While APR shows the base rate, APY reflects the actual return considering reinvestment.

Why is this important? Because, all else being equal, APY will always be higher than APR. And this difference grows with increased compounding frequency. This can mean that choosing the right metric for evaluating crypto investments drastically affects your actual profit.

How APY works: compound interest in crypto investments

To understand APY, you need to grasp the concept of compound interest. It sounds complicated, but the essence is simple: interest is accrued not only on your initial amount but also on the already earned interest.

Here’s the formula for calculating APY:

APY = (1 + r/n)^(n×t) - 1

Where:

• r — nominal interest rate (as a decimal)
• n — number of compounding periods per year
• t — time in years

Let’s look at a concrete example. Suppose you invest $1,000 on a lending platform with an annual rate of 8%, and interest is compounded monthly.

Calculation: APY = (1 + 0.08/12)^(12×1) - 1 ≈ 0.0830 or 8.30%

See the difference? With a simple APR, you’d expect exactly 8%, but thanks to monthly compounding and reinvestment, your actual return is about 8.30%. Although the difference seems small for one year, over several years, the effect accumulates.

In crypto investments, this becomes even more significant. Imagine a platform that pays out daily. Then, the difference between 10% APR and APY will be even larger.

Compounding frequency: why it’s critically important

The frequency with which a platform pays out your earnings directly influences the APY. The more often interest is compounded, the higher the APY at the same nominal rate.

Crypto interest can be compounded:

• Daily (most advantageous)
• Weekly
• Monthly
• Quarterly
• Annually (least advantageous)

Let’s compare two competing offers with a 6% annual rate but different compounding frequencies:

Option 1: Monthly compounding APY = (1 + 0.06/12)^(12×1) - 1 ≈ 6.17%

Option 2: Quarterly compounding APY = (1 + 0.06/4)^(4×1) - 1 ≈ 6.14%

Although the difference is minimal, monthly compounding yields a slightly higher APY. Over large portfolios, these small differences add up significantly.

APY versus APR: when to use each metric

Choosing between APY and APR depends on the type of investment you’re considering.

Use APR when:

• You are lending or borrowing crypto assets without reinvestment
• Staking without automatic reinvestment of rewards
• You need a simple, easy-to-understand metric
• Comparing investments with similar interest structures

Use APY when:

• The platform automatically reinvests earnings
• Comparing savings accounts or lending platforms
• DeFi platforms automatically compound rewards
• You want a realistic estimate of actual returns

Practical examples: staking and lending

Let’s look at some real scenarios to better understand the difference.

Scenario 1: Staking without reinvestment

You participate in a staking program with a 12% APR, with rewards paid once per year. In this case, APR and APY will be the same — both 12%. Investing 1,000 tokens will yield exactly 120 tokens after a year.

Scenario 2: Lending with monthly reinvestment

You lend $10,000 on a platform offering a 7% APR, with interest compounded monthly. The actual APY will be approximately 7.23%. This means after a year, your total will be about $10,723, not just $10,700.

Scenario 3: DeFi farming with daily compounding

A DeFi platform offers 20% APR with daily interest accrual. The real APY will be around 22.13%. Here, the difference is substantial — nearly 2% more each year.

Advantages and disadvantages of each metric

APR — pros and cons:

Advantages:

• Simple and intuitive
• Easy to calculate manually
• Good for quick comparisons of basic rates

Disadvantages:

• Doesn’t reflect actual returns with reinvestment
• Can be misleading if you’re unaware of compounding
• At frequent compounding, it can differ significantly from real income

APY — pros and cons:

Advantages:

• Shows real return considering reinvestment
• Allows fair comparison across different compounding frequencies
• Helps avoid surprises

Disadvantages:

• More complex to calculate
• Some confuse it with APR
• Might be less intuitive for beginners

How to choose the right approach to evaluate returns

When analyzing any crypto investment offer, follow this process:

1. Determine if reinvestment is planned. If the platform automatically reinvests, focus on APY. If not, use APR.

2. Find out the compounding frequency. The more often interest is compounded, the larger the difference between APR and APY. Daily compounding yields significantly higher APY than annual.

3. Compare offers using the same metric. Don’t mix APR and APY. Compare APY with APY, APR with APR.

4. Consider risk. High APY can be attractive, but ensure you understand the platform’s safety and stability. Extremely high rates often indicate higher risk.

5. Check if the rate is fixed or variable. Some platforms offer variable rates that may decrease over time. Clarify this before investing.

Final recommendations for crypto investors

Understanding the difference between APY and APR is not just theoretical — it’s a practical tool to maximize your profits. A seemingly small difference of one or two percentage points can mean thousands of dollars annually for large portfolios.

Always verify which metric a platform uses when choosing an investment. If a platform advertises a high rate but doesn’t specify whether it’s APR or APY, be cautious. Reputable platforms transparently display both figures and explain how they are calculated.

Use the calculation tools provided by platforms to compare options, and remember: choosing the correct yield metric is already half the success in crypto investing. As more platforms offer automatic reinvestment, investors need to be equipped with this knowledge to properly evaluate their opportunities.