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APR vs APY: What’s the Difference in Crypto?

Sep 23, 2022

What is APR?

APR stands for Annual Percentage Rate and is one of the most important acronyms you can find when it comes to financial products.

In particular, it refers to the earnings you can achieve on the money you lend or the interest you have to pay on the money you borrow.

This term might sound weird to all crypto beginners, but the crypto market offers you countless opportunities – including credit products involving interest rates.

The APR indicates the annual interest associated with these kinds of products, telling you which is the asset or platform that offers you the best rates.

This rate is calculated by taking into account the interest and the periods in which the interest rate is applied, according to the following formula and expressed in percentage:

This is the formula to calculate the APR (Annual Percentage Rate). If you want to know the full amount you should return or receive, you should include the principal by using this formula:

APR = Principal x Interest rate applied periodically x Number of periods.

In the crypto market, you can find APR applied, for instance, on the money you borrow or to your savings accounts. In this sense, crypto credit products are not very different from traditional ones.

What is APY?

The APY is also applied to financial products, but it is very different compared to the annual percentage rate.

APY stands for Annual Percentage Yield. It is also known as EAR, Effective Annual Rate.

You can read our article on APY in crypto to better understand how APY is calculated: it takes into account not only the interest rate and periods in which the interest is applied but also compounding.

Formula to calculate the APY (Annual Percentage Yield).

Simply put, the interest rate is calculated not only on the principal but also on the interest accumulated over time.

You can find APY calculated for crypto savings accounts or for the money you lend to the crypto market.

What is the difference between APY and APR?

APR and APY might seem very similar, and actually, there are some similarities, but there are also some key differences that can allow you to understand better what kind of investment you might prefer.

APR vs. APY in crypto is not very different from APR and APY in traditional financial markets. Still, you will notice that rates are usually higher in this market – especially when it comes to DeFi opportunities.

This happens especially for two reasons:

Higher risks;
Fewer intermediaries.

So, if you feel comfortable enough with investment activities that don’t simply involve buying and selling orders, the difference between APY and APR will be extremely useful.

Both are expressed in percentage, and both refer to interest rates. The key difference is that while APR is considered a simple interest calculation, APY involves compounding – which causes higher interest rates.

This implies that when it comes to crypto lending – which takes into account these kinds of calculations on interest rates – the perspective is different according to the position you choose to cover.

The Borrower’s Perspective

If you’re the borrower, you’ll prefer lower interest for sure.

This is obvious if you think that interest is, in this case, the additional amount of money you need to return after the principal – that is, the amount of money you initially borrowed.

That’s why borrowers prefer APR – and the lower the APR, the better since it means that they would need to return the lowest interest rate.

The borrower’s perspective.

Despite this, as a borrower, you should consider that even if some platforms don’t directly communicate the APY, this doesn’t mean that it doesn’t exist. Even if this is less common in the crypto space, this doesn’t mean there are no possible mistakes or hidden costs behind the corner.

Just to give you a practical example, you might find a platform that allows you to borrow money with a very low APR, but maybe you’ll need to have huge collateral to cover the risks taken by the platform. Actually, some crypto lending activities are not very convenient if you plan to borrow money with the smaller collateral possible. In fact, in some cases, the collateral has to be larger than the amount you can borrow. But lending is still beneficial if you plan to use another crypto asset and you don’t want to get rid of the assets you already own.

That’s why you should always consider having a specific plan before borrowing in the crypto market – and the practical use case we’ve just mentioned is a good example of why you should know what APR is. However, you shouldn’t consider only this element.

The Lender’s Perspective

If you’re the lender, you’ll be interested in receiving the highest amount of interest rate.

That’s because, in this case, interest rates represent the additional amount of assets you will earn for the simple reason that you lent your cryptos.

The lender’s perspective.

This is the reason why lenders look for platforms with the highest APY. But also in this case there are some elements you should take into account.

Consider that APY represents what you can actually pay – or earn, in this case – but some platforms don’t directly share clear information about the APY.

For instance, you can find a crypto lending service that uses APR and APY as synonyms – so you’d need to make sure that the interest rate you earn over time is included to earn additional interest.

Or you might need to choose between fixed and flexible interest rates protocols – when interest rates are flexible, they vary according to higher or lower demand for the assets you’re investing in. So, lenders need not only to understand the characteristics of the different methods used to calculate interest rates but also to consider each investment according to their needs, goals, and capability to manage risks.

The Bottom Line

Different financial products available in the crypto market allow you not only to place buying and selling orders but also to find many opportunities to manage and make the most out of your crypto assets.

Borrowing, lending, savings accounts: all these products allow you to find new possibilities to increase your capital and to find good possibilities to create some streams of crypto passive income.

But more products need more knowledge: crypto enthusiasts who want to benefit from all these opportunities should always know the different aspects that should be considered.

It’s worth it: the crypto space allows you to buy, sell, hodl, borrow, lend your assets to earn interest, and much more to allow you to have full control over your financial activity. But a deep understanding of the market should always be the starting point.

In particular, all those financial products that involve interest rates use specific terminology you should know to perfectly understand the most evident and hidden opportunities and costs involved in each activity.

APR and APY are part of this terminology, and their importance for crypto lenders, borrowers, and savers is the reason why we covered the topic in-depth with this article.
Just as a takeaway, remember: APR calculates interest rates only on the principal; APY calculates interest rates on both principals and interest produced over time.

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