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How to Calculate Crypto Interest

Last updated 29th Nov 2022
Disclosure

Why should you learn how to calculate crypto interest? Because many cryptocurrency investment products offer impressive returns and interest rates, especially compared to traditional investment products' returns. However, if you want to know more about crypto investment interest rates or how to take out a loan, you first need to learn about APY and APR.

By familiarizing yourself with these two concepts, you can maximize the returns on a crypto investment or reduce the interest payments when taking out a loan.

Calculating Crypto Interest

If you have opened a savings account at a bank, you have probably seen the acronym APY (Annual Percentage Yield) on your investment. It indicates the expected return on your investment over 12 months.

Although a higher APY equates to a higher return on your investment, if the number is excessive (e.g., 250%), you should steer clear of these projects as they're too risky for an investor looking for a reasonable investment with consistent returns.

In this article, we will explain what APY is, how to calculate crypto APY and the differences between APY and APR.

What is APY?

The annual percentage yield (APY) on an individual's investment includes compound interest that has accrued on top of the original investment. This means that you receive interest on the original investment as well as interest on the interest.

Moreover, APY works similarly for DeFi liquidity pools and crypto savings programs. For example, if you deposit 1,000 USDC at 5% APY, you will receive 1,050 USDC at the end of the first year from the deposit date.

Calculate Your Interest With a Crypto APY Calculator

By multiplying the value by the principal, you get the yield using the APY. For example, here is a simple calculation to determine how much interest you will earn every 30 days on a 5% APY 30-day plan, with an initial deposit of $1,000 USDC, if you want to break down your total APY into specific periods (e.g., one week).

Interest = (Principal X APY / 365) X Period

Interest = (1,000 X 0.05/365) X 30

Weekly interest ≈ 4.10 USDC

This means that if you withdraw your money after one week, you will not benefit from the compound interest effect added to your balance. On the other hand, if you do not withdraw your money for a year, the interest will be paid weekly and added to your balance, with the interest rate increasing over time.

7-Day APY in Crypto

Interest is usually compounded once a month at traditional banks. On the other hand, most crypto institutions have shorter compounding periods; the most common is seven days. Sometimes shorter periods are used for the following factors:

  • Some investors may find the high volatility of cryptocurrencies risky, but shorter compound interest periods allow investors to reduce the impact of price fluctuations.

  • Shorter compound interest periods are suitable for investors who are still trying to decide whether to get involved with cryptocurrencies and want to try out this form of investment first.

  • Investors can ensure that the annual percentage yield is as high as stated by the financial institutions.

Fortnightly and monthly are two other common time frames. Nevertheless, the APR is still set annually.

What is APR in Crypto?

When lending cryptocurrency or making it accessible for loans, investors can expect an interest rate in the form of a percentage, known as the annual percentage rate, or APR. It considers additional fees a borrower must pay but excludes compound interest.

The APR is the regular interest rate applied to the loan or investment principal. If an investment or loan is held for a shorter period of time, a prorated amount of interest is charged because the APR is an annualized rate. For example, a six-month investment with an interest rate of 5% APR will return only 2.5% of the principal.

How to Calculate APR

When lending cryptocurrency or making it accessible for loans, investors can expect an interest rate in the form of a percentage, known as the annual percentage rate, or APR. It takes into account additional fees a borrower must pay but excludes compound interest.

The APR is the regular interest rate applied to the loan or investment principal. If an investment or loan is held for a shorter period of time, a prorated amount of interest is charged because the APR is an annualized rate. For example, a six-month investment with an interest rate of 5% APR will return only 2.5% of the principal.

The Key Differences Between APY and APR for Crypto

APY and APR for cryptocurrencies are two components that are very similar as they are both standard interest rates. However, the two differ in a number of ways. The table below lists some of the differences between APR and APR for cryptocurrencies:

APYAPR
Compound interest is taken into account by APY.APR disregards compound interest.
The compounding effect raises borrowing costs andinvestment growth.Investment growth or borrowing fees are not as expensive as APY.
Best for savers.Best for borrowers.

How to Earn Interest on Your Crypto Investment?

Centralized exchanges have provided a means for cryptocurrency investors to generate interest. They allow investors to:

  • Earn interest by lending cryptocurrencies.

  • Set up a cryptocurrency savings or interest account.

These options offer excellent interest rates, often far higher than those offered by banks or other conventional financial organizations. Since cryptocurrency investors are constantly looking for the biggest profits, this is where DeFi comes in. DeFi offers investors new ways to earn interest on unused balances and has transformed the cryptocurrency market. Some examples include:

  • Placing assets in the liquidity pools of DeFi lending applications.

  • Adding assets to the liquidity pools of DeFi exchanges.

  • Placing assets into yield farm protocols.

APR vs. APY: What is Best for You

The APY allows investors can find out how much money an account may earn. What is owed is shown by APR. It is more accurate to calculate both over the course of a year rather than just the interest rate.

Instead of investing in crypto assets and hoping for a return, borrowers looking for the best interest rates may find it more beneficial to use APR, which is calculated on an annual basis.

The APY, on the other hand, is more beneficial for cryptocurrency investments because it gives a more realistic picture of what will be gained once the money is invested and compound interest begins to kick in, as it is based on an annualized rate that includes compound interest.

When investing or borrowing, it is important to know whether profits or payments are based on APR or an APY. Due to the nature of the cryptocurrency market, profits are often higher than in traditional banking, but so are the risks.

FAQs

Is APY yearly or monthly?

It is determined annually and presented as a percentage. Annual Percentage Yield (APY) is the rate of interest that can be earned on an account over the course of a year, including compound interest.

What does 7 day APY mean in crypto?

An annual return based on seven-day results is called a seven-day APY. It is determined by converting the annual percentage from the net exchange rate difference between today and seven days ago.

Which crypto has highest staking APY?

OKX offers up to 300% APY.

What is APR in staking crypto?

The annual percentage rate (APR) is the financial value or reward that investors can receive when they provide their cryptocurrency tokens for loans, taking into account interest rates and all other costs that borrowers must pay.

Emma Dwyer

Emma Dwyer

Emma is a law graduate with seven years of experience working in financial services. She has been writing in the cryptocurrency and blockchain tech space for two years now. Recently she worked as a Managing Editor and Head of Content for different crypto publications.