APR vs. APY: Which One Maximizes Your Crypto Returns?

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When it comes to investing, maximizing one’s returns is the name of the game. Straight-forward, right? Except…it’s not. Beginners who are just starting to get their feet wet will soon notice that different crypto platforms, each offering different investment products, use either annual percentage rate (APR) or annual percentage yield (APY) to denote the returns offered.

APR and APY may sound identical, but they’re quite different. In this article, we break down what each metric means, and more importantly, which one should you focus on when trying to determine which product offers more bang for your buck and gives you better returns?

APR vs. APY

APR stands for Annual Percentage Rate. It is the simple annual rate of interest that is paid on a loan or earned on an investment in cryptocurrency.

APY, on the other hand stands for Annual Percentage Yield. It is the annual rate of return that is earned on an investment, including the effects of compounding interest. It is the effective annual rate, or real rate, of return of an investment, and gives you a more accurate calculation of the returns on your investment.

Imagine you had $1,000 to invest and there was a product that gave you 5% APR, with monthly compounding interest. By the end of the first year, you will have pocketed more than $1,050. In fact, you would have about $1,051.16. In other words, your APY would have been 5.1162%.

This may not be much higher than 5.0%, but if you extrapolate the period of investment, or began with a larger initial sum this small amount ends up making a big difference!

Calculating APY and APR

Let’s say there was a product offering you a 6% APR; your APY i.e. your actual rate of return would amount to 6.1678%. You can easily do this conversion using various free online tools to convert APR into APY and vice versa if you know the frequency of compounding.

Now that you’re clear about the difference between APR and APY, you will be better equipped to determine which crypto product out there will be a better investment. Here are some guidelines:

• When comparing different products, say one with returns in APR and another with returns in APY, you need to convert both to APY in order to make a correct comparison i.e. apples to apples, oranges to oranges.
• When comparing different products, both with the same APR, you need to check if the interest is compounded daily/weekly/monthly/yearly. The more frequent the compounding is, the higher the APR is. This is why some crypto platforms stress that their earn products are “compounded daily” to offer a more attractive promise of returns.

Here is a table that shows the difference between APR and APY for different compounding frequencies:

Compounding Frequency

Other Considerations

Alas, if only it were as simple and straight-forward as choosing the product with a higher APY. This is because there are other factors to consider, such as the below, which will impact your final returns.

• The fees associated with the product: Some products may charge fees that reduce your overall return, such that even if you chose a product with a higher APY, it may ultimately not yield you that much in the end.
• Risk of the product: Cryptocurrency investments often come with varying levels of risk. Some investments may offer higher APYs but if you factor in the risk involved, it may not be a wise choice. This is most commonly seen when comparing the usually lower BTC staking returns with that of some newly launched altcoin, which is more susceptible to hype or even rug-pulls.