Recently, I started reviewing how new investors in crypto understand the topic of returns, and I realized that many people confuse basic concepts that later end up costing them money. One of those is APY.

Look, if you’re into crypto, you need to understand well what APY is because it can literally be the difference between making good profits or losing. The annual percentage yield isn’t just any number—it's what you’ll actually earn considering compound interest, that “interest on interest” effect that makes your money work for real.

Most people see APY and APR and think they are the same, but they’re not. APR is the simple rate without compounding, while APY does account for how your gains generate more gains. In practice, if you see an APR of 2% but the APY is 3%, that 1% difference comes precisely from compounding. It sounds small, but in large investments over the long term, it’s quite significant.

Now, calculating APY in crypto isn’t as straightforward as it seems. Market volatility, liquidity risks, and smart contract risks all come into play. It’s not the same as calculating APY in a traditional financial product.

APY appears in three main types of investments in crypto. First are loans—you connect with platforms where you lend your crypto and receive interest at an agreed rate. Then there’s yield farming, which is more aggressive—you borrow assets to earn more crypto, moving your money between markets in search of the highest returns. There, APYs can be enormous, but so can the risks, especially if it’s a new platform. And there’s staking, which is more relaxed—you lock your crypto in a blockchain network and receive rewards. Especially in PoS networks, APY tends to be quite attractive.

The reality is that if you want to choose well among investment opportunities, APY gives you a much more complete view than APR because it truly reflects what you’ll earn with compounding. But here’s the important part—APY is only one metric. It’s not everything. When you analyze any crypto investment, you also have to consider volatility, liquidity risks, and your own risk tolerance.

Each type of investment has its own advantages and disadvantages. It’s not enough to focus only on high APY numbers if there are risks behind them that you’re not seeing. That’s the mistake you see repeating itself all the time in the market. That’s why it’s important to use APY as just one more tool in your analysis, not as the only reason to invest.