Understanding what APR is versus APY in different cryptocurrencies and how to distinguish between them

What is APR? It’s a question that beginners in crypto investing often encounter. You may have heard that APR and APY are two terms used to describe earning money, but the difference between them can be confusing. This article will help you understand what APR means, its different types, and how it clearly differs from APY.

What is APR? - The Basic Interest Rate You Should Know

APR stands for Annual Percentage Rate, meaning “percentage rate per year.” In the context of investing and borrowing, APR is the simple interest rate that shows how much your principal will earn or cost over a year.

For example, if you have an APR of 5%, it means every 100 baht you invest will earn 5 baht in a year. Conversely, if you borrow 100 baht at an APR of 5%, you need to repay the principal plus 5 baht interest.

Understanding APR is important so you can estimate borrowing costs or investment returns overall. The key point is that APR does not account for compound interest, making calculations simpler but potentially not reflecting the true overall return.

Types and Uses of APR in the Crypto World

There are two main types of APR relevant to investment or borrowing decisions:

Fixed APR: The interest rate remains unchanged throughout the loan or investment period. This means you will pay or receive the same amount each year. The advantage is predictable returns or costs.

Variable APR: The interest rate fluctuates based on market conditions and platform policies. Borrowers face the risk of higher rates if the market becomes volatile.

In crypto, APR is used to calculate income from staking—locking tokens on a network to secure it, similar to earning interest. It’s also used for crypto lending on DeFi platforms, where interest is paid in digital currencies. For example, if you invest 1.0 ETH at an APR of 24%, you’ll earn an additional 0.24 ETH after a year, totaling 1.24 ETH.

What is APY? - The Return Including Compound Interest

APY stands for Annual Percentage Yield, meaning “percentage yield per year.” The main difference from APR is that APY accounts for the effect of compounding interest, meaning you earn interest on your interest.

In digital currencies, compounding often occurs daily. This means you earn interest on your accumulated interest every 24 hours. When considering compounding, an APR of 6% translates into a higher APY. For example:

• 6.09% when compounded semi-annually
• 6.14% when compounded quarterly
• 6.18% when compounded daily

Because of daily compounding, APY yields the highest returns.

How to Easily Calculate APR and APY

Calculating APR is straightforward. You can use this formula:

APR = P × T

• P = interest rate per period
• T = time (in years)

For example, if you invest 10 Bitcoin at an APR of 6% per year, after one year you will have 10.6 BTC (10 + 0.6 from 10 × 6%).

Calculating APY is more complex because it includes compounding:

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

• r = interest rate (decimal)
• n = number of compounding periods per year

For example, if you invest 10,000 baht at an APR of 5%:

• Without compounding, you get 500 baht interest, totaling 10,500 baht.
• With daily compounding, you might get approximately 512.68 baht interest, totaling 10,512.68 baht.

The difference may seem small in the first year, but over longer periods, the effect of compounding significantly increases returns.

How APR and APY Differ in Crypto Investing

Both APR and APY are used to calculate interest for crypto investments and loans, but they serve different purposes:

APR tells you: How much you will pay or earn in a year, considering only the interest rate, without accounting for compounding. It’s often used by borrowers because it shows lower costs.

APY tells you: The actual return you will get in a year, including the effects of compounding interest. Investors prefer APY because it reflects a higher, more accurate earning potential.

Here’s a quick comparison table:

How to Apply APR and APY in Crypto Investments

Staking: Locking tokens on a blockchain to earn interest. It’s a passive investment method because you lend your tokens and receive interest.

Yield Farming: An advanced strategy to generate income from crypto. You provide tokens to liquidity pools on DeFi platforms, enabling the platform to offer services. In return, you earn rewards expressed as APR or APY.

Real-world example: You invest 1,000 USDC on a DeFi platform offering an APR of 24%. If your funds are locked for a year, you’ll earn an additional 240 USDC. With APY compounded daily, your actual earnings could be around 271.46 USDC, depending on the compounding frequency.

Simplified Example of APR

To clarify further, consider this comparison:

Scenario: You invest 10,000 baht in a savings account with a 5% annual rate.

Using APR only (no compounding):

• Year 1: Earn 500 baht → total 10,500 baht
• Year 3: Earn 1,500 baht → total 11,500 baht

Using APY (with annual compounding):

• Year 1: Earn 500 baht → total 10,500 baht
• Year 3: Earn approximately 1,576.25 baht → total 11,576.25 baht

The difference of about 76.25 baht may seem small short-term, but over longer periods, the effect of compounding makes APY more advantageous.

Summary: What is APR and Why Differentiate from APY?

APR and APY are two key concepts you must understand to make the most of your crypto investments. Knowing what APR is and how it differs from APY allows you to make smarter investment decisions.

For borrowers, APR indicates the cost (the lower, the better). For savers and investors, seeking higher APY provides a clearer picture of actual returns.

With this understanding, you can confidently choose DeFi platforms for staking or yield farming. APR is no longer a confusing term but a vital tool for managing your digital finances.