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When you start trading cryptocurrencies, you might get confused by all the terms from the blockchain and banking industries. And while blockchain-related words may sound familiar, some investment terminology is pretty hard to grasp.
That’s why, today, we’ll talk about investment interest, APY, and APR. And hopefully, by the end of this article, you’ll be able to tell the difference between the two.
APR is an abbreviation for annual percentage rate, which means yearly funds that you get as investment interest. This usually includes any additional costs or fees you have to pay along the way but does not incorporate compounding.
The essence of APR is a simple interest rate, so your profit depends directly on the original investment.
Here’s how you can calculate simple interest:
P — principal investment
R — rate of interest (yearly)
T — time (usually, number of years)
For example, if you invest 1,000 coins with a 10% yearly interest rate, you’ll get 1,100 coins by the end of the first year, 1,200 coins by the end of the second year, and 1,500 by the end of the fifth one. Of course, this does not include any applicable fees. Yet, your investment will steadily grow by about 10% from the original investment every year.
However, when it comes to APY, the situation radically changes.
APY stands for annual percentage yield, which is the actual rate of return earned on an investment, considering the compound interest.
Compound interest, in contrast to the simple one, allows investors to get interest on interest, adding their profit to the initial sum of investment. For instance, in the DeFi world, you can get the rewards for staking and add them to the overall staked coins so that you receive higher profit next time.
Here’s a formula to calculate APY:
r — period rate
n — number of compounding periods
To give you a better idea, we’ll provide an example of an APY as well. Let’s say you invest the same 1,000 coins as before but add compounding to the whole thing. If your compound interest is 10%, with daily compounding, you’ll get 1,105 by the end of the first year, 1,221 by the end of the second year, and 1,648 by the end of the fifth one. Moreover, the higher the interest rate and the more time you take, the better the outcome.
As you might have already understood, APY and APR are almost the same tool but bring you different results. Both refer to the yearly investment interest, but APY provides higher yield profit due to compounding.
At the moment, most DeFi tools and cryptocurrencies use APR, and if you want to receive compound interest, you’ll have to do compounding manually. Many users re-invest their profit daily or weekly to get higher profit this way.
At DeHive, we are working on the automatic compounding mechanism, which will help traders receive APY with no extra effort. Hopefully, we’ll finalize all the preparation soon and release it in the near future. Stay tuned for the good news!
- APR means annual percentage rate, the investment rate you get with simple interest.
- APY stands for annual percentage yield, which is based on the compound investment.
- APY is more profitable than APR since it includes interest on interest and not only interest on the initial investment.
- In DeFi, APY is mostly possible due to manual compounding, when users add their interest to the initial investment every day in order to get more profit.
- DeHive is currently working on the automatic compounding tool, which will facilitate the trading process and make it much more beneficial for all our users.
