If you are someone who just trades with cryptocurrencies, APY is something that you won’t be dealing with all that much, but if you are also an investor in crypto, then this is one of the most important things to take into consideration. When you are staking your cryptocurrencies to earn interest, you will usually be met with two different types of interest rates. There is the regular interest rate, which simply adds interest on your initial investment each month, while APY on the other hand works a bit differently. So what exactly is APY and why does it matter?
Annual Percentage Yield In Crypto
APY stands for “annual percentage yield” and it takes compounding interest into account when calculating the interest rate it gives you. What this means is that whenever you are investing in crypto and staking these tokens for APY, you get more and more interest each month. So when you staked a set amount of crypto, the first month will be a simple interest rate month, and you will get a percentage of what you staked. The second month is when things change and APY comes into play. When the second month rolls around, instead of giving you interest based on your initial investment, it adds the interest gained from the previous month on top of your initial investment and gives you interest based on the total.
How to calculate APY?
If you want to calculate how much interest you will earn from your investment when using APY, there is a simple formula that you can use.
APY = (1 + APR/n)ⁿ − 1
Here n stands for compounding periods each year. Each staking platform will give you different compounding periods, which refers to how often you will be getting your APY. Some might give out APY each month, so 12 payouts in total, some might be paid each 2 months, and so on.
Should you use APY?
While looking at this from the surface, it might seem that using APY will always be better than using APR (Annual Percentage Rate), the interest you are paid annually, but if we take a look at some minute details, there might be some second thoughts to that. First of all, most of the big cryptocurrencies will have small APYs, and when you calculate the possible earnings earned from this APY, they will most likely be just slightly better than earnings earned from APR. There is a way to get better APY, but when doing so, you will be taking the locked APY staking option. Locked staking means that, whenever you are staking your cryptocurrencies, they will be locked for certain periods of time, such as 2 months, 3 months, 1 year, etc. This creates a bit of risk, as if the price of this cryptocurrency falls, you will not have access to these tokens in order to sell them and limit your losses, and there is no stop-loss option. If this fall is not a very small one, then even with earned APY, you will still end up with losses. This creates a high-risk, high-reward style of investments, and you are banking on the fact that the price of this crypto will not fall. To avoid this problem, you can stake stablecoins, as these tokens maintain a $1 value and it will be the same as investing in regular fiat. Most of the stablecoins have very low APYs, even locked ones, but there are also times when exchanges need liquidity and in order to get this liquidity, they attract people with high APYs. Just be sure that this is a legit exchange, as there are many scam websites that lure people with their high APYs, but then don’t give them anything back.
FAQs on APY in Crypto
Is APY paid monthly?
APY can be paid monthly, but it can also be paid at different intervals as well. Whenever you are opening a savings account or staking your crypto, you will be notified how often you will receive APY. It can be daily, weekly, monthly, yearly, etc. and it comes down to the platform you are using for staking.