While the Crypto world is full of potential risks, it’s also full of potential gains. One of the best ways to generate profits using your Crypto holdings is through the annual percentage yield (APY).
But what exactly is APY in Crypto? How does it work? Is it profitable? Is it risky or safe? Find answers to all of these questions (and more!) in this article about APY in Crypto…
What is Annual Percentage Yield (APY) in Crypto?
Annual percentage yield (APY) functions as a savings account for Cryptocurrency. This is similar to the idea of an APR account. While APY is frequently linked to conventional savings, it also serves as an important indicator for Cryptocurrency savings programs.
When you deposit any Crypto asset you have (e.g. BTC), you get a fixed return in a set amount of time. The money you earn on your account within 12 months is calculated using the annual percentage yield (APY). Therefore, this method is used to monitor the growth of interest over time.
By keeping your Cryptocurrencies in savings accounts, using yield farming to provide liquidity pools with liquidity, or staking your holdings, you can earn APY on your Crypto holdings. It is not hard to start earning an annual percentage yield on your Cryptocurrency holdings—you can do so via Crypto exchanges, DeFi protocols, and wallets.
The APY on your investment considers compound interest, which accumulates or increases as the balance does. Compound interest is the name for the interest you receive on your money. It describes the sum you get on the main amount, which is the money deposited into your account, and the accumulated interest.
So, interest on interest and interest from the initial deposit are both included in compound interest. Compounding is a powerful financial tool since it allows for the creation of money over time. Simple interest is not the same as this. Simple interest is interest that is just earned on the main deposit, as the name implies.
Which Factors Can Affect Your Crypto APY?
There are several factors that could possibly affect your Crypto APY, one of the most important ones is inflation. The term ‘inflation’ describes the gradual decline in a currency’s value. In the world of Cryptocurrency, inflation describes the practice of adding Crypto tokens to the system. The fact that digital coins like BTC are intended to have a low and predictable inflation rate is one of its main draws. The staking returns for a specific network are affected by the inflation rate. The profits are eroded if the rate of inflation for your coin is higher than your APY.
Another key factor that can have an impact on your APY is supply and demand. Because interest is determined on how much demand there is for a certain Cryptocurrency, market forces can affect your APY. When the supply is high, interest rates are typically lower, but when there is a shortage, interest rates are typically higher. Similar to this, the yield on Cryptocurrency varies depending on liquidity and demand for Cryptocurrencies.
The amount of compounding used, which can differ, also has an impact on how the APY is calculated. Keep in mind that as the number of compounding periods rises, APY also does.
Why is Crypto APY High?
APY provided by Crypto financial institutions is usually higher than the APY provided by traditional banks. This is due to the fact that more volatility and less restrictions cause APR in Cryptocurrency to rise. The type of digital coin and its capitalization determine the exact APR, which drives the APY higher.
Additionally, interest rates in Cryptocurrency are often set by a large number of institutional participants who have high levels of activity in the market. High APY and APR result from the industry’s high profits and risks.
What is a Seven-Day APY?
The interest is typically compounded one time each month in traditional banking. However, with Cryptocurrency institutions, the interest is compounded in a short period of time; the most common time period employed by Crypto institutions is seven days.
They make the compounding period short to minimize the impact of price movements, which may entail a lot of risk for some investors due to the volatile nature of Cryptocurrency. Institutions also do this to enable their clients to confirm that the APY is accurate and manipulation-free. Plus, shorter compounding periods give a good opportunity to investors who are apprehensive about investing in Cryptocurrencies but would like to test the waters.
- Note: 30 and 14 days are two other prominent time frames. Despite this, the APY is still determined annually.
What Differentiates APR from APY?
In a nutshell, APR is based on the idea of using borrowed money to spend it, while APY is based on the idea of earning money via lending. If you are a borrower, you should seek out low APR since it includes lower interest on the loans. But if you’re a lender, looking for a high APY ensures that you receive a high return on your investment.
So, the lower the APR the better, and the higher the APY the better.
Before deciding to deposit your Crypto holdings to receive interest in return, keep in mind that there are several different Cryptocurrency yield programs available. So you need to carefully choose the one that you think is the most suitable for you and can best meet your financial expectations. Different platforms may have different admission restrictions, fees, asset types, and interest-earning policies.
Some Cryptocurrency exchanges provide an introductory APY, but we recommend that you exercise caution before making an investment. Some of them first give higher APYs to draw clients and then lower the rates once they have a sizable client base. So you need to do your research about the reputation and trustworthiness of any yield farming program or platform that offers high APYs first.
Other than that, if you’re an ambitious Cryptocurrency investor looking to earn an interest on your holdings, a Crypto savings account with APY is the way to go!