It is not easy to make investments in cryptocurrencies, but what is even much harder is keeping up with the profit and losses of each trade and investment. As a crypto investor, you are likely to lose out on certain opportunities if you don’t possess the ability to make certain calculations.
One of the essential skills an investor needs to possess is the calculation of metrics like annual percentage yield. Hence, we have crafted a special guide that helps crypto traders/investors understand the meaning of APY and how they can calculate it. Brace up for this informative article.
What is APY in Crypto?
In a more general sense, APY is also known as the annual percentage yield, and it is the amount of profits your investment makes within a year. When you invest, you expect it to make massive profits, right? When calculating the profits, the APY is the rate at which the investment grows within a particular year, considering the compounding interest of your investment. Now, let’s put it in a crypto investment context.
There are always those who want to make massive profits in the crypto market; the first step to reaching this stage is understanding how to make calculations. One of the things to learn is how to calculate APY in the context of your crypto investments. Assuming you invested in Cardano (ADA) over a particular period, APY is used to measure the growth or the rate of profit of such investment over that period.
For instance, when you invest around $2,000 in a cryptocurrency with an APY of around 10%, the total worth of the investment will be $2,200 at the end of the year. This means you made a profit of around $200 within that period. One of the important things to note is that the APY between cryptocurrencies differ — there are those with 80% APY and those with none.
Difference Between Annual percentage yield (APY) versus annual percentage rate (APR)
When making those investments, investors often argue about the difference between Annual percentage yield (APY) and annual percentage rate (APR). When the two are closely examined, there are crucial differences between them. Nevertheless, these two calculations are fundamental when calculating the profits made by your crypto investment.
As we said above, Annual percentage yield (APY) is the total profit of an investment over one year while considering the compounding interest of the investment. On the other hand, the annual percentage rate (APR) is also used to calculate the interest on an investment over a year. However, the difference here is that the annual percentage rate (APR) does not consider the compounding interest of the investment. Also, there are often arguments that the annual percentage rate (APR) is primarily used in traditional finance, while APY is used majorly by crypto investors.
How to Calculate APY in the Crypto Ecosystem
Now that you understand the meaning of APY and how it differs from APR, how do you now do the calculations? Many crypto traders and investors often leave out the annual percentage yield (APY) calculations because they often consider it complex. However, when it is properly explained, it is quite a simple task to carry out.
The first thing is to learn the formula for APY, which is APY = (1 + (r/n))^n — 1
In the formula above, the “r” stands for the stated interest. The “n” represents the number of times the interest is compounded yearly.
Let’s see a practical calculation of this:
Assuming you invest in yield farming with a 15% interest rate, which compounds monthly.
The equation would be (1 + 0.15/12) to the power of 12–1.
So:
0.15/12 = 0.0125
1 + 0.0125 = 1.0125
1.0125 to the power of 12 = 1.160
1.160–1 = 0.160
Therefore the APY is = 16.0%
Crypto Investments that Can Earn APY
Crypto investments aren’t only about buying cryptocurrencies from an exchange, keeping them in a wallet, and waiting for them to increase after some time. There are so many other investment options in cryptocurrency that will require you to make calculations using the APY metric, and they include:
- Hodling
As stated above, one of the most explored investment methods in the crypto world is the hodling of cryptocurrencies. This is simply when investors buy cryptocurrencies and leave them for an extended period to cash out after they might have increased in value. When making this type of investment, you will need the APY calculation to determine if you are making a profit from the investment each year.
- Staking
Staking is another form of crypto investment that requires APY calculations, as the actions here are often long-term. Staking happens when you delegate a certain amount of crypto assets to be locked up over a period and released after it elapses. APY is often used to determine if this investment is making a profit or a loss.
- Yield Farming
Yield farming is just like staking, but this time around, it involves lending out your crypto assets over a predefined period to get a profit after it elapses. To be a successful yield farmer, you must be able to calculate the potential APY of platforms to identify the best opportunities for your assets.
Importance of Crypto APY
The importance of learning how to perform calculations related to annual percentage yield (APY) on any crypto asset cannot be overemphasized. The APY of a crypto asset is basically a metric that helps to tell you how much profit you are liable to get at the end of a year while considering the compounding interest. By learning how to measure this metric, you can quickly determine whether it is worth it to make a particular investment.
For instance, assume there are two cryptocurrencies. The first has an APY of 10% and the other an APY of 100%; knowing how to calculate these will help you know that the latter offers more profit than the former. In summary, learning APY helps you make better decisions and identify better opportunities in the market.
Conclusion
Above, we discussed the meaning of annual percentage yield (APY) and how it shows the profit of an asset over a year while putting together the compounding interest. Besides this, there are many investments in which one can employ annual percentage yield (APY) in the profitability calculations. Some include investments like yield farming, normal crypto hodling, and staking of cryptocurrencies. Notably, the formula for APY calculation is APY = (1 + (r/n))^n — 1.
Disclaimer: BingX does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. Readers should do their own research before taking any actions related to the company. BingX is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the article.
