Determining the APY and corresponding interest for a particular cryptocurrency can seem like a daunting task, especially if you’re not good with formulas and calculations. However, calculating interest to distinguish between potential cryptocurrency assets only requires plugging in a few numbers that you can easily find.
Learning how to calculate interest and APY for a cryptocurrency investment opportunity can guide you in making a better-informed decision when it comes to investing in digital currencies, no matter which platform you choose.
How Does APY Work in Crypto?
APY means annual percentage yield. The APY of a cryptocurrency investment expresses the yearly return on investment as a percentage. These crypto interest returns compound within an APY structure and largely depend on the cryptocurrency that the crypto investor buys as well as the compounding period frequency on the crypto market.
Most investors leverage a cryptocurrency platform’s APY in determining the best return on investment possible for their capital. By the same token, higher crypto APY rates do not necessarily translate to a wise passive income investment, as they can indicate certain characteristics of that platform and/or particular cryptocurrency.
The ability to remove funds to profit from high APYs may largely depend on the platform’s terms, as some require you to leave the initial deposit or principal and any interest within the account to continue to earn compounded interest. For example, some cryptocurrency savings accounts offer an APY based on how long the crypto remains in that account.
Factors That Influence APY
Supply and demand, inflation, and the frequency of compounding periods affect the annual percentage yield for most cryptocurrency accounts.
- The number of new tokens arriving on a network increases inflation rates, if only slightly. Successful investors keep a watchful eye on inflation rates to protect their digital assets. If inflation rates rise above APY rates, the result is a wash.
- The APY of a cryptocurrency mirrors interest rates: when interest rates are high, returns on cryptocurrency investments follow suit. If the Federal Reserve lowers interest rates, it’s harder to earn a high APY rate on your cryptocurrency investment.
- As compounding periods increase, so too do dividends. For example, a compounding frequency of 12 per year, or once per month, will achieve a higher return on investment than a compounding frequency of two, or every six months.
How To Calculate Interest in Crypto
Interest compounds faster for cryptocurrency investments that offer a more frequent compounding period. However, annual percentage yield calculations still report returns on an annual basis.
It is important to note that an APY does not include associated fees within the interest calculations. Deduct these fees from your APY to determine the final profit value for that particular cryptocurrency investment.
Interest Calculation Formula
Investors typically calculate interest earned on cryptocurrency platforms with the following formula:
(1 + Interest rate)^compound frequency per year – 1 = Annual Percentage Yield (APY)
You may come across formulas that determine a 7-day APY. This is commonly done to mitigate the ever-changing cryptocurrency rates, account for the volatile nature of this type of currency, and avoid the effects of manipulation found within this largely-unregulated investment opportunity. Newcomers to the cryptocurrency world favor this seven-day calculation as well.
Let’s say a cryptocurrency platform offers a 2% interest rate that compounds weekly, or on a seven-day basis:
(1 + 0.02)^52 weeks – 1 = 180% APY
In addition, common calculations can include a 14- and/or 30-day APY, too. In this case, you would substitute the 52 weeks with 26 to calculate a 14-day APY of 67.34%. Replace the 52 weeks with 12 for your 30-day calculations to get an APY of 26.82%.
As you can see, compounding the interest more often results in a higher APY than compounding even on a monthly basis.
APY Versus APR
In contrast to APY, the annual percentage rate (APR) refers to the annual interest rate you’ll pay to obtain a particular loan, such as a credit card or personal loan. Rather than compounding interest like an APY, the APR calculates a simple interest rate. Most APRs exist as a function of the monthly rate multiplied by 12 since there are 12 months in a year.
Annual percentage rate (APR) = interest rate X periods per year
24% APR = 2% interest X 12 months per year
When it comes to cryptocurrency, lenders make money by charging borrowers an APR that coincides with their investment goals. Borrowers tend to prefer lenders that offer lower APRs. Conversely, investors prioritize opportunities with a higher APY.
Ways To Increase APY in Crypto
Saving, lending, staking, and yield farming cryptocurrency lend themselves to a high APY for the majority of investors.
Lending
Borrowing cryptocurrency can help bolster your investment and increase your profit margin in the future. This is especially true if you don’t want to part with the crypto you currently own but want to obtain a loan to purchase more of the same commodity.
The flip side of this relationship is cryptocurrency lending, which allows you to lend borrowers your cryptocurrency in exchange for interest. In many cases, the interest rates range from 3-17%, which is similar to and yet higher than what you’d find on high-yield savings accounts. These traditional savings accounts typically top out around 5%, but they often don’t extend the same benefits as cryptocurrency.
Most lenders require borrowers to “over-collateralize” their crypto, meaning the exchange rate between U.S. dollars and cryptocurrency favors the traditional currency. For example, to obtain a loan for $10,000 to invest in cryptocurrency, you may have to over-collateralize your cryptocurrency to the equivalent of $15,000 or more.
Saving
Another long-term investment opportunity you can take advantage of with cryptocurrency is a cryptocurrency-specific savings account. Simply deposit your cryptocurrency and let it gain interest as you would with any savings account.
The APY rates for a crypto savings account are typically lower than the market rate. As with traditional finances, assets that sit there tend to make less than those invested.
Staking
Profitable cryptocurrency platforms that offer higher APYs act as the middleman between their customers and Proof of Stake blockchains. Chosen investors validate cryptocurrency to earn dividends. The longer an investor allows the platform to use their cryptocurrency assets, the more the investor can earn through crypto staking.
There are a number of staking options available for investors to choose from, with varying APYs. As with lending cryptocurrency, you can stake on both centralized and decentralized cryptocurrency exchanges. The best part about cryptocurrency staking is that you don’t need anything to get started, beyond cryptocurrency assets.
Yield Farming
The practice of moving one’s cryptocurrency assets around to find the best APY dominates the time of a yield farmer. These investors lend cryptocurrency within liquidity pools to increase their holdings, with the intent to constantly monitor the available APY rates for the best opportunity. Maximizing profits stands as the goal, but the time frame necessary to achieve it can be a deterrent for some investors.
Investors often earn dividends in the same cryptocurrency in which they’ve invested, but this is not always the case. In fact, earning interest in another form of cryptocurrency can help diversify your portfolio to minimize risk.
Where To Earn the Highest Annual Percentage Yield in Crypto
Most lenders seek out both centralized and decentralized platforms to offer cryptocurrency lending services. The former relies on third-party regulations while the latter depends on smart contracts to complete transactions.
- DeFi: This platform typically offers 100% or more APY on popular cryptocurrencies such as the stablecoin Binance (BNB).
- AQRU: You can earn a higher APY on Bitcoin (BTC) with AQRU.
- eToro: Cardano (ADA), Tether (USDT), and Ethereum (ETH) are popular among investors on this cryptocurrency platform.
- Coinbase: Investors can also take advantage of Ethereum (ETH) on this popular platform, which also offers Cosmos (ATOM) and Tezos (XTZ) currencies.
You can easily start investing in cryptocurrency on DeFi, AQRU, eToro, and Coinbase to earn a high APY to increase your digital assets.
Risks and Benefits of APY in Crypto
Investing in cryptocurrency platforms to maximize the APY can result in the following:
- You can easily open several accounts with differing cryptocurrencies to not only mitigate risk but also diversify your portfolio.
- Cryptocurrencies have a high rate of return on investment in the long term.
- There’s the undeniable potential for a high rate of return on crypto assets that spike in popularity and value.
With high risk comes high reward. Here are some of the downfalls of APYs in cryptocurrency:
- A high APY tends to characterize an immature cryptocurrency that is susceptible to failure and/or a scam. Green investors typically seize these opportunities for the potential high rewards, but sometimes the risk can be too great.
- When inflation rates rise too high, cryptocurrency APY rates suffer.
- As an alternative currency, the potential remains for the commodity to completely lose value as a whole.
- Regulations come slowly, leaving the door open for hackers, scammers, and related schemes.
As you seek out cryptocurrency investment opportunities, be sure to consider the volatility of the market, any associated fees, the number of compounding periods, and any other barriers that might exist for new investors specifically.
For example, a platform may offer a stellar introductory APY, but after a predetermined period of time, that APY may decrease dramatically.
Conclusion
Earning a high annual percentage yield (APY) on cryptocurrency assets can greatly increase your investment profits. At the same time, knowing how to calculate APY and interest, when combined with other evaluating factors, can help you determine which cryptocurrency opportunities to take advantage of and which to avoid.
As you gain experience in investing with cryptocurrency, you can use this fledging asset to your advantage to achieve your financial goals.
Sources:
Compare Crypto Lending Interest Rates for September 2022 | DeFi Rate
Earn Interest On Your Crypto Portfolio, Crypto Investment | AQRU
Grow your ETH holdings with Ethereum staking on eToro | eToro
