Cryptocurrency has been a trending topic in the world for several years. The idea of making money online with cryptocurrency is increasing day by day. According to Forbes, almost 43% of males in the United States aged between 18 and 29 have invested or traded cryptocurrency.
Remember that cryptocurrency or blockchain is not an easy topic; it is one of the most challenging things to learn. You need to invest a lot of time with diligence to gain knowledge. Otherwise, you should forget about the profit because crypto is known for volatility.
The only thing that can save your investment is “knowledge.” That’s why we’ve come up with a crucial topic today, which is APY in Crypto. If you’ve heard about the term APY, then well and good, otherwise you should learn about it.
Don’t worry; we’ll not explain the concept of APY in Crypto only with a difficult definition. Rather, we’ll explain it from the start and in simple words. So let’s get started.
What Is Cryptocurrency? How Does It Work?
The first thing that is necessary for you is to understand “what exactly is cryptocurrency?” You may hear about virtual currency, which represents digital money that we can’t hold physically in reality. However, we can use digital money electronically.
Cryptocurrency is the virtual currency of our world (non-official). It exists digitally, not in real life. It’s a decentralized currency based on blockchain technology. It means it doesn’t depend on one central organization like a government or bank; it provides authority to its users or miners.
For instance, the first cryptocurrency, Bitcoin, is a peer-to-peer system. No entity like the government, bank, or other private organization can interrupt the transactions. When people do the transaction, the miners verify these payments and get paid in BTC for their services.
The individuals who own crypto can easily use it to buy anything they want, whether services or goods. You can transact the money in crypto anywhere in the world in a few moments with a minimum fee and without third-party interference.
What Is APY In Crypto?
The term APY signifies Annual Percentage Yield; this term explains how much interest a person can earn from the assets. In simple words, APY is the annual return rate of investment, but the interest you’ll get will be compound interest.
APY can give you an idea of which currency is best when you look at its returns. You can understand which currency is the fastest-growing and which one is a volatile currency. So, you can decide on your investment in the right coin by considering APY.
What Is Simple Interest?
If you’re facing a problem understanding compound interest, here’s an example for you. Usually, when we give a loan to someone, we calculate the interest rate according to the loan’s original amount. This interest rate is known as simple interest.
For instance, you have a friend, and you’re giving him a loan of $10,000 for two years with a 5% yearly interest rate. So you’ll calculate the simple interest rate of one year like this:
5% x $10,000 = $500 (first-year simple interest rate)
The second-year rate will also be the same as the first year.
5% x $10,000 = $500 (second-year simple interest rate)
You’ll get a $1000 interest rate in two years on the loan of $10,000.
What Is Compound Interest?
Compound interest is a different thing from simple interest. In compound interest, we calculate the interest rate according to the original amount and the amount of interest we accumulate over the period.
For example, if you’re giving the same amount of loan, $10,000, to your friend for two years with a 5% compound interest rate, you’ll get more profit. Here’s the calculation.
5% x $10,000 = $500 (first-year compound interest rate will be same)
However, in the second year, you’ll get the interest on the original amount ($10,000), and the first-year interest ($500) means a total of $10,500.
5% x $1500 = $525 (second year compound interest rate)
This is why the compound interest rate is more beneficial because you’ll get the perks of $25 extra interest.
How Does APY Work In Crypto?
Now you might be thinking about how APY (Annual Percentage Yield) works in crypto, right? Don’t worry; we’ll also answer this question briefly.
Like we open savings accounts, save our money and get interest rates over it. The same goes for cryptocurrency. If you own crypto and want to earn a profit on the original amount and interest, you can do it by keeping them in savings accounts.
Different types of cryptocurrency exchanges, wallets, and decentralized finance protocols (Defi) provide interest-earning opportunities. Bear in mind that the APY rate depends on the project or company where you’re investing. The APY can be 4%, 5%, or even more; it varies.
One more thing, just like the APY rate, the transaction fee, investment procedure, and charges, everything will vary from platform to platform. So be careful while making decisions and do proper research about the project before investing in it.
How Is APY Calculated?
To calculate the APY, you’ve to follow the formula we’re mentioning below:
APY= (1 + r/n )n – 1
- R = Interest rate
- N = Compounding Period Each Year
So, now it depends on you, what you want to use. We recommend you to use the website’s calculator as you can understand the interest rate you’ll get within seconds.
Difference Between APR And APY
Some people think that APR and APY are the same and have exact meanings. It is only a misunderstanding that both are different, and if you feel that both are the same thing, you’re making a mistake.
APR means Annual percentage rate, and APY refers to Annual percentage yield. Both are different; the biggest thing that creates a difference is the interest rate. APY is more beneficial, and you’ll get a high-interest rate compared to APR.
The reason is APR doesn’t incorporate compound interest. If you’re keeping 1000 coins in a savings account that offers 10% APR annually, you’ll get 100 coins which means 1100 coins at the end of the year.
In the second year, due to interest, the coins will get 1200. In APR, you’ll not get the perks of compound interest.
Why Is the APY So High In Cryptocurrency?
If you think that all types of crypto coins have high APY, you’re completely wrong. The reason is APY percentage depends upon the coin. For example, if you have coins of specific crypto that are not in demand, the APY percentage will be lower.
Like if you have Bitcoins that are the most in-demand worldwide, the APY percentage you can get will be higher than other coins. Famous platforms such as BlockFi or Celsius offer 6% – 8% APY on Bitcoin investment. Therefore, it depends on the crypto coins you have.
Frequently Asked Questions (FAQs)
How does APY work in crypto?
APY means Annual Percentage Yield; it signifies the interest you can earn by investing your crypto or keeping in the saving accounts. APY is beneficial because you’ll get the interest rate on your original investment as well as on interest.
What does 5.00% APY mean?
Suppose you have 10,000 coins of any cryptocurrency and want to save it in a savings account that offers 5% APY. It doesn’t mean you’ll get a 5% monthly APY. Instead, it represents that you’ll get 5% (500 coins) at the end of the first year.
After that, you’ll get a compounding interest rate based on the total amount (10,500), which means the original coins (10,000) and the coins you get as interest (500) for your investment.
What do 7 days APY mean in crypto?
The 7 days APY means the annual yield of the money market fund will be calculated by taking the price seven days ago and today’s price.
Is crypto APY guaranteed?
Cryptocurrency is known for its volatility rate, and this is true in crypto. No one can guarantee you profit. The same goes for a crypto savings account as FDIC does not insure crypto accounts, so there’s no guarantee that you’ll get the profit or interest rate back on the investment.
Which crypto has the highest APY?
The number of cryptocurrency coins right now is more than 8000, and it will increase more in the future. All crypto is different in terms of features and prices, so the APY is also different. The highest APY crypto is Bitcoin, the most in-demand crypto coin.
Should I put all my savings in crypto?
There’s no doubt that you can make a lot of profit in a short period through crypto. The APY savings accounts are also a great way to earn high interest on your investment.
However, putting eggs in one basket is the worst decision anyone can make. In short, it is dangerous to lose all of your crypto assets.
Undoubtedly, crypto is one of the best ways to earn a high profit over investment. You can also keep them in the APY saving account and earn high-interest rates if you have crypto coins. With APY, your crypto assets can increase in several years.
However, the only thing you should not forget is that crypto means a most volatile investment. So, make sure you’re investing after the proper research.
Hopefully, you’ve understood the concept of APY in crypto and how it works. If you still have any confusion feel free to ask it below in the comment section.