APR vs APY in the crypto world: What are the differences and why are they important to you

Beginner in the digital investment space often finds themselves confused between APR and APY terms. Although simple, both of these data points have a significant impact on your returns. This article will clarify them clearly.

What is APR: The Standard Interest Rate

APR stands for Annual Percentage Rate, which indicates the simple percentage rate per year. It shows how much interest you will earn or pay on the principal over a one-year period.

For example, if you invest 100 THB in an asset with an APR of 5%, you can expect to earn 5 THB in interest after the year ends. That’s it. No additional calculations, no complexity.

In the context of credit cards, APR is not charged immediately. Instead, when you do not pay the balance on time, interest is added to the next billing cycle.

There are 2 main types of APR:

Fixed (Fixed APR): Your interest rate remains unchanged throughout the loan or investment period. The amount you pay or receive per year is always fixed.

Variable (Variable APR): Interest can change according to market conditions and the lending platform’s policies. Borrowers generally pay more when the market is highly volatile.

What is APY: The Yield Reflecting Compound Interest

APY stands for Annual Percentage Yield, which measures the actual return on investment when considering compound interest.

The difference is very important: with APY, you not only earn interest on the principal but also on the accumulated interest.

For example, if you invest 10,000 THB at an APY of 6% with daily compounding, in the first year, you will earn more than 600 THB because interest is compounded every 24 hours.

Differences between APR and APY in Crypto

To understand better, let’s see how 6% APR converts to APY with different compounding periods:

• Semi-annual compounding: 6.09% APY
• Quarterly compounding: 6.14% APY
• Monthly compounding: 6.17% APY
• Daily compounding: 6.18% APY

As seen, more frequent compounding results in higher APY.

How APR and APY Work in the Crypto World

Staking: A simple way to generate passive income

Staking means “locking” your tokens on a blockchain to support the Proof-of-Stake mechanism and earn interest as a reward. This concept is fundamental to modern DeFi technology.

Most Thai DeFi platforms display daily returns, meaning you see continuous compounding happening.

Yield Farming: Deeper investment

Yield Farming is a strategy similar to staking but more complex. You provide tokens to a liquidity pool and earn rewards for supplying liquidity to the platform. Returns are often shown as APR or APY depending on the platform.

How to Calculate APR and APY

Basic APR formula

APR = Periodic interest rate × Number of periods per year

Example: If you invest 10 Bitcoin at an APR of 6% over 1 year:

• P = 6% × 1 year = 6%
• Return = 10 BTC × 6% = 0.6 BTC

If APR is expressed as a monthly percentage (0.5%):

• P = 0.5% × 12 months = 6%

APY formula considering compound interest

APY = ((1 + r/n)^n - 1)

Where:

• r = interest rate over the period, expressed as a decimal
• n = number of compounding periods per year

Example: Investing 1 ETH at an APR of 24% in a DeFi Lending Pool

If compounding occurs daily, APY will be significantly higher than 24%, meaning:

• After 1 year, you should have 1.27 ETH (1 ETH + accumulated interest)
• Not just 1.24 ETH as indicated by APR

Practical Example: APR vs APY

Suppose you have 10,000 THB and decide to invest in a savings account with 5% interest per year.

Using APR only (no compounding):

• Year 1: 10,500 THB
• Year 2: 11,000 THB
• Year 3: 11,500 THB

Using APY with daily compounding (compounded daily):

• Year 1: 10,513 THB
• Year 2: 11,052 THB
• Year 3: 11,576 THB

The difference may seem small, but over time and with larger investments, compounding makes a significant difference.

Which is better: APR or APY?

The answer depends on your role in financial decision-making:

For investors and lenders: APY is better because it reflects the actual return. Compounding accelerates your money growth.

For borrowers: APR is better because it shows a lower interest rate, reducing borrowing costs.

In the crypto world, returns are often much higher than traditional markets but come with higher risks. Choosing APY is usually preferable when investing for the long term.

Summary

APR is the simple interest rate that does not consider compounding, while APY is the actual yield that accounts for compounding.

In the crypto industry, both rates are widely used in DeFi products like Staking and Yield Farming. Understanding these differences will help you make smarter investment decisions and maximize your profits.

Although calculation formulas may seem complex, many online tools are available today to help you compute easily. The key is understanding the concepts of APR and APY to make better decisions when investing in digital assets.