Choosing APY or APR for your crypto: The difference you need to know

For newcomers entering the crypto game, the terms APR and APY are two concepts that often cause confusion. But in reality, they are quite simple to understand. Knowing the difference and how it affects your money this year and beyond is important. Let’s see what APR means and why it’s significant for our crypto investments.

APY and the “Magical” Compound Interest

APY stands for Annual Percentage Yield, which tells you how much profit you actually make in one year because it includes the effect of compounding interest.

Think of it this way: Suppose you deposit coins on a platform with a 5% annual rate. To be honest, the interest doesn’t just hit your account once; it might accrue daily or hourly. When new interest is added, it becomes the base for the next calculation. This is called “compound interest.”

For example, if you put 1.0 ETH into a Lending Pool with an APY of 24%, you won’t just get 0.24 ETH. Naturally, compounding makes your money grow faster. If you use the actual APY that accounts for daily compounding, you might earn more than 0.24 ETH.

APR, Which Has No “Deception”

APR stands for Annual Percentage Rate, which is straightforward interest calculation. If the APR is 5%, it means you earn 5% of the principal in one year—no more, no less.

For example, if you borrow or invest 100 units at a 5% APR, next year you will owe or receive 105 units. No compounding, no hidden fees.

In the context of credit cards, APR shows how much interest you pay if you miss payments for several months. But wait, APR doesn’t include all costs—initial fees, penalties, or additional charges are usually not included.

For crypto, APR makes calculations simpler because there are no hidden fees or costs. Interest is calculated from the principal from the start, without adding previously earned interest into the base.

Why does APY differ from APR?

The fundamental difference is APY includes compounding, while APR does not.

• APY: You earn interest on the principal + interest on the interest earned before = faster growth
• APR: You earn interest only on the principal = slower growth

Check the formulas:

• APR = (P × r × t) ÷ 100
• APY = ((1 + r/n)^n - 1

where r is the rate, n is the number of compounding periods, t is the time period.

Staking and Yield Farming: When to use APR and when APY?

) General Staking

When you stake your tokens on a blockchain like ETH on Ethereum after the Proof-of-Stake transition, you lock your coins and receive rewards. Here, APY is often used because rewards are reinvested into the system, causing compounding. If staking rewards accrue daily, and you don’t withdraw, by the end of the year, your returns will be higher than the APR suggests.

Yield Farming

In yield farming, you deposit tokens into liquidity pools on DeFi platforms and receive rewards. Some platforms quote APR, others quote APY, depending on whether rewards are compounded into the system or not.

Real Example: 10,000 Baht over 3 Years

Suppose you invest 10,000 Baht at a 5% annual rate:

If calculating only APR (without compounding):

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

If calculating APY ###with compounding(:

• Year 1: 10,500 Baht
• Year 2: 11,025 Baht
• Year 3: 11,576 Baht

See how, over three years, APY yields an extra 76 Baht just because of compounding? Now, imagine higher rates like 20% or 50% common in crypto. The difference can amount to hundreds of thousands of Baht.

APY vs APR: Which to choose?

If you are an investor )holding coins(: Always look at APY. That’s the real amount you will earn. Don’t fall into the trap of APR, as it doesn’t reflect the actual returns.

If you are borrowing money: Check the APR. The lower, the better, because often the borrower’s APY will be higher than APR due to compounding.

Which is better?

Be aware: In normal markets, the difference between APR and APY may not be significant. But in crypto, these rates can be very high—)20%, 50%, even 100%(—making compounding a huge factor. The longer the period, the more APY benefits you.

Also, be cautious when you see very high rates. In crypto, higher rates mean higher risk. Sometimes, an APY of 100% indicates a very risky project or aggressive marketing. Always verify carefully.

Clear Summary

• APR = Simple interest per year )without compounding(
• APY = Actual interest per year )including compounding(
• For Staking and Yield Farming in crypto, APY is usually used because it shows your real profit.
• Faster compounding )daily rather than monthly( results in higher APY

Understanding this difference helps you choose platforms and investment tools wisely, avoiding numbers that look good but aren’t realistic.