How to understand APR and APY: A complete guide for crypto investors

If you are serious about cryptocurrencies and looking for ways to grow your portfolio, sooner or later you will encounter two key terms — APR and APY. While both indicators reflect potential investment returns, they work completely differently. Misunderstanding them can cost you serious money. In this article, we will clarify what these metrics mean, why they differ, and how to choose the right indicator for a specific investment.

Why it is critically important for investors to distinguish between APR and APY

When it comes to staking, lending, or participating in DeFi protocols, choosing between APR and APY can significantly impact your final earnings. The difference between these metrics becomes especially noticeable with long-term investments and frequent reinvestment of income.

The main problem is that many platforms display this information differently. One shows APR without considering compounding, while another immediately indicates APY with the effect of compound interest already included. If you do not understand the difference, it’s easy to overestimate your actual income or, conversely, overlook a profitable offer. Therefore, understanding both indicators is fundamental to smart cryptocurrency investing.

What is APR in the context of crypto investments

APR (Annual Percentage Rate) — is the annual interest rate that shows what percentage of profit you will receive over a year, without accounting for reinvestment of interest. It’s a simple, straightforward metric: invested $100 at 10% APR — you get $10 profit in a year, and that’s all.

In the crypto industry, APR is used everywhere: on lending platforms, when offering staking rewards, in margin trading. It’s a popular metric because it’s easy to understand and calculate.

How APR is calculated in practice

On lending platforms. Here, investors lend their assets and earn interest. The formula is simple:

APR = (interest earned over a year / principal) × 100

Example: you loan 1 BTC at 5% per annum. Over a year, you will receive 0.05 BTC as interest. That’s your APR.

When staking tokens. The investor locks their tokens in the network for validation and receives rewards:

APR = (total rewards over a year / staked amount) × 100

If you stake 100 tokens, and the network gives a 10% reward per year, you will receive 10 new tokens over 12 months. That will be your APR.

Main advantages of APR

• Simplicity of calculation. No need to consider complex formulas with exponents — everything is calculated straightforwardly.
• Transparency for comparison. If two platforms offer the same payout structure, APR provides a fair comparison.
• Clarity of basic income. You know exactly how much you will get in absolute terms if you do not reinvest the income.

Disadvantages to consider

• Incomplete picture of income. APR ignores the effect of compounding — earning interest on interest.
• Problems when comparing different schemes. If one platform pays interest daily, and another monthly, APR will not show the real difference in income.
• Risk of misunderstanding. Investors often confuse APR with actual annual yield, forgetting that it’s only a basic rate without reinvestment.

APY — the full picture of your income

APY (Annual Percentage Yield) — is the annual percentage yield that shows the real annual income, taking into account all effects of compounding. If APR is what the platform promises, then APY is what you actually get.

The main difference: APY considers how often interest is accrued and reinvested. If your earnings are automatically added to the principal and start earning interest themselves, this will be reflected in APY.

How compounding works and why it’s important

Compound interest — is when you earn interest not only on the initial amount but also on the accumulated interest. This creates exponential growth of your capital.

Formula for calculating APY:

APY = ((1 + r/n)^n×t) - 1

Where:

• r — nominal rate (as a decimal)
• n — number of compounding periods per year
• t — time in years

Practical example. You invest (on a platform with an annual rate of 8% and monthly interest accrual:

APY = )(1 + 0.08/12)^12×1 - 1 ≈ 0.0830 or 8.30%

See? With monthly compounding, your actual income will be 8.30%, not the stated 8%. The difference seems small, but over large sums and long periods, it accumulates.

$1000 Impact of interest accrual frequency

The more often a platform accrues and reinvests income, the higher the final APY. Let’s compare two platforms:

Platform 1: 6% per year with monthly accrual APY = ((1 + 0.06/12)^12×1 - 1 ≈ 6.17%

Platform 2: 6% per year with quarterly accrual APY = )(1 + 0.06/4)^4×1 - 1 ≈ 6.14%

The first platform yields slightly more due to more frequent interest accrual. On sums of millions of dollars, this difference becomes noticeable.

( Advantages of APY

• Accurate picture of income. APY shows what you will actually receive over a year, considering all accruals and reinvestments.
• Fair comparison. You can honestly compare investments with different interest accrual schemes.
• Realistic expectations. You won’t be disappointed because APY already includes all effects.

) Disadvantages of APY

• Harder to calculate. You need to apply formulas with exponents, which can confuse beginners.
• Requires careful analysis. It’s not enough to just look at the number — you need to understand how often interest is accrued.
• Less intuitive. Most people understand simple interest better than complex calculations.

Direct comparison: where APR, and where APY

Practical guide: when to use each indicator

Use APR when:

1. You need to lend crypto. On lending platforms, APR is usually indicated. It shows the basic income from lending an asset.

2. You participate in staking without automatic reinvestment. If you receive rewards directly and decide what to do with them, APR accurately reflects your periodic income.

3. You need a quick estimate of basic profitability. APR is the first number the platform shows. It’s useful for a quick “roughly how much I will earn” comparison.

( Use APY when:

1. The platform automatically reinvests income. Most modern DeFi protocols and crypto savings accounts operate with automatic compounding. Here, APY is needed for honest assessment.

2. You compare several investments with different schemes. One platform accrues interest daily, another weekly? Look at APY — only it shows the true comparison.

3. You plan long-term investing. Over a horizon of 5-10 years, the difference between APR and APY can be significant. APY will give you a realistic forecast.

Real-world scenarios

Scenario 1: urgent crypto loan
The platform offers to borrow 10 BTC at 6% APR for a year. You will get 0.6 BTC after a year if you do not reinvest anything. Here, APR is the right choice.

Scenario 2: staking Ethereum on Lido
The Lido protocol provides daily rewards and automatically reinvests them. If it states 3.5% APR, the actual income will be closer to 3.54% APY due to daily compounding. You need APY for planning.

Scenario 3: crypto savings account
If the account accrues interest monthly and keeps it on the account, then for honest comparison of several accounts, look at each APY.

Scenario 4: participating in DeFi farming
You provide liquidity to a pool, receive fees, which are automatically kept in the pool and start earning income themselves. Look exclusively at APY — it reflects your real profitability.

Why high interest rates can be risky

If someone offers you 100% APY on a new token — it’s not always good. High interest rates often signal increased risk:

• New, unestablished protocols may be vulnerable to code errors
• Unstable rewards can quickly drop if the number of participants decreases
• Ponzi schemes use high interest rates to attract new investors
• Token volatility can wipe out your entire income

Investors should always seek a balance between profitability and safety. Platform reputation, code audits, and liquidity status are often more important than high APY.

Conclusion: how to make the right decisions

The difference between APR and APY is not just academic. In practice, it affects your actual income:

• APR — is the basic rate offered by the platform. Use it for a quick understanding of the investment potential.

• APY — is what you will actually receive if the platform reinvests income. Use it for serious analysis and long-term planning.

Before investing:

1. Determine if automatic reinvestment will occur
2. Find out how often interest is accrued
3. Compare APYs of different platforms under the same conditions
4. Assess risks, not just returns
5. Start with small amounts to understand the real income

Smart use of these two indicators will turn you from an investor guessing why income is lower than expected into an investor who knows exactly what they will get and can compare offers on equal footing.