APR vs APY in Crypto: What is it? – How it works in Staking – Difference and Yield Calculation

APR and APY in Cryptocurrencies: How to Choose the Right Yield Metric

Just a few years ago, discussions about percentages in the world of cryptocurrencies seemed like something far from reality. The main focus was on the growth of Bitcoin's price, the launch of new altcoins, and hyped ICOs. Cryptocurrency was perceived primarily as a speculative asset – buy low, sell high.

But with the development of decentralized finance (DeFi), the emergence of advanced staking mechanisms, and growing interest in passive income, entirely different questions have come to the fore. What yield will I get if I invest my tokens on a platform? Is it worth locking assets for several months? What to choose – a project with 10% APR or another with 8% APY?

For a newcomer to the market, these terms can be confusing, so in this article, we will break down APR and APY in detail: what they are, the difference between them, show examples of use, and much more.

APR – Definition

APR (Annual Percentage Rate) is a metric reflecting the annual interest rate, excluding compound interest. This indicator is almost always used when calculating returns from staking, lending, and other financial operations in the cryptocurrency sphere.

Suppose you invested 1 BTC at 5% APR. It turns out that after a year you will receive a profit of 0.05 BTC (as the annual percentage was 5%), without taking into account the reinvestment of profit.

Difference Between APR and APY

Newcomers to the market often confuse these two indicators, but in reality, they have a significant difference:

• APR only takes into account the simple interest rate, without reinvesting profit. The profit received is not used for further investments, and interest is charged only on the initially invested amount;

• APY (Annual Percentage Yield) includes the effect of compound interest, that is, the profit from reinvesting the earned interest. As a rule, APY is calculated once a month, and the profit received is immediately used for reinvestment, thereby increasing the annual profit thanks to compound interest.

Thus, at the same interest rate, APY will always be higher than APR if compound interest is applied.

How is APR Calculated?

Usually, platforms calculate APR independently, but if you need to perform your own calculation, you can do it as follows: (annual income / initial investment) × 100%.

For example, if you invested 10,000 USDT and the profit was 1,000 USDT, then your APR was 10%.

Pros and Cons of Using APR

Pros:

• Simplicity of calculation and understanding. The mechanics here are the same as with a bank deposit, thanks to which even a person without experience in cryptocurrencies can figure it out;

• Suitable for short-term investments without reinvesting profit. The income received will not be used in any financial operations, which provides more opportunities in investing.

Cons:

• Does not take into account the effect of compound interest, which can lead to an underestimation of potential yield when reinvesting. The fact that the profit received is not reinvested is both good and bad at the same time.

• May be less accurate for long-term investments. The fact is that crypto platforms can unilaterally change the APR depending on the market situation. It may happen that you provide coins for use under a certain APR, and it will not be possible to withdraw them before the deadline, while the service provider platform changes the percentage for the next month. As a result, funds cannot be withdrawn and you will have to settle for a small annual percentage.

Examples of APR Use

APR is widely used in various cryptocurrency operations:

1. Staking. APR was first used here. Today, many blockchain platforms offer a fixed APR for participants who lock their tokens to support the network;

2. Lending. Decentralized finance (DeFi) platforms provide loans at a certain interest rate, which may differ depending on the cryptocurrency, platform, market conditions, and other factors;

3. Yield farming. Some projects specify APR to estimate potential profit from providing liquidity. At the same time, the reward is often accrued in the project's tokens, and not in the cryptocurrency that was provided for farming.

Frequently Asked Questions

Which is better – APR or APY?

The choice between APR and APY depends on your investment strategy:

• APR is suitable for short-term investments without profit reinvestment. Often, crypto investors use the profit received to buy other assets, leaving their cryptocurrency on deposit;

• APY is preferable for long-term investments with profit reinvestment, as it takes into account compound interest. Sometimes platforms allow not to reinvest income, but when this function is enabled, it is unclear why an investor would use APY if there is APR.

What is 20% APR in crypto?

This means that you will receive 20% profit on your investment per year, excluding reinvestment of earned interest.

What does 10% APY mean?

This means that taking into account the reinvestment of interest, you will receive 10% profit on your investment per year.

Is a high APR good or bad?

By high APR, we mean a percentage that is significantly higher than the market average. Usually, when a platform offers an inflated APR, it may indicate the following factors:

• The platform is young, and to attract investors, it has to increase the APR. There is nothing wrong with the platform being young, however, in rare cases, these could be scammers. That is why the platform used must be carefully checked before providing it with your cryptocurrency;

• The purposes for which the platform offers to take your cryptocurrency and pay APR involve increased risk. These could be crypto loans or products with unconfirmed utility and questionable security. It is clear that investments cannot be entirely safe, but in this case, the chances that your cryptocurrency will not return to you increase.

Legislative Aspects of APR

Regulation of APR in the cryptocurrency sphere varies by jurisdiction. In the USA, for example, regulatory bodies such as the SEC and CFTC actively monitor the activities of cryptocurrency platforms, especially in the field of lending and investments. Recent changes in US crypto regulation policy indicate a loosening of some restrictions, which may affect the use of APR in various products.

If we talk about global practice, there are no established laws or frameworks. The state regulator of each country treats digital assets differently. However, the use of APR in the crypto market usually does not cause any questions from the authorities, so providing cryptocurrency for use and receiving an annual income expressed as a percentage is normal practice.

Comparison of APR in Various Fields

APR is used not only in cryptocurrencies but also in traditional financial instruments:

• Credit cards. APR reflects the annual interest rate on debt;

• Mortgage loans. APR includes the interest rate and additional costs associated with the loan;

• Consumer loans. APR is used to calculate the total cost of the loan, including fees and additional charges. This allows the borrower to compare different loan offers on equal terms.

In the cryptocurrency sphere, APR is applied in similar scenarios: for example, if you take a loan in stablecoins against ETH collateral, a platform like Aave or Compound will indicate the APR you pay on that loan.

However, unlike traditional banks, in DeFi platforms, rates can be dynamic and depend on the supply and demand of liquidity.

Thus, in both worlds (traditional and cryptocurrency), APR plays a key role in evaluating the profitability and transparency of financial decisions, but in cryptocurrencies, an element of asset volatility and smart contract risk is added to it.

Support and Resources

Courses and Training

For a deeper study of APR and other yield metrics, you can take specialized courses:

1. Binance Learn & Earn – interactive courses with the opportunity to earn tokens for successful completion;

2. DeFi Academy by Moralis or Chainlink – cover all aspects of decentralized finance, including APR and APY;

3. Coursera and Udemy – blockchain and finance courses with modules on staking and investment;

4. Analyst YouTube channels – for example, Coin Bureau, Finematics, and The Defiant regularly publish videos with visualizations and practical advice.

Such courses will help not only to understand the theory but also to apply knowledge in practice – when staking, participating in DeFi projects, farming, and lending.

Tools for Calculating APR

There are many online calculators on the market that help investors quickly estimate potential yield:

1. StakingRewards Calculator – takes into account APR, APY, token cost, and investment volume;

2. CoinCodex APR Calculator – simple interface, calculation based on the selected cryptocurrency;

3. APY.Vision – DeFi yield aggregator, tracks farming, staking, and liquidity;

4. DeFi Llama – shows current APR and APY rates on various platforms.

Conclusion

APR is an important tool for evaluating yield in the world of cryptocurrencies. Its strength lies in its simplicity: it allows you to quickly estimate how much you can earn in a year without taking reinvestment into account. However, in the long term, especially with automatic interest accrual, it is APY that gives a more accurate idea of real profit.

When choosing between APR and APY, it is important to consider not only the numbers but also:

1. Investment period;

2. Interest accrual mode;

3. Platform risks (hacks, liquidity losses, price drops);

4. Legal aspects and regulation in your jurisdiction;

Understanding these metrics, their differences, and correct application in practice allows investors to extract maximum benefit from their assets, whether through staking, farming, or DeFi lending.