Many crypto traders today seek passive-income opportunities, that allow them to stake or invest in cryptocurrencies and get steady returns over time. If you are an active trader who falls into this category, you may have seen a crypto project that promises you 10%, 20%, or 30% returns, but what does this really mean in practice? Well, when you encounter something like this, it most times refers to the Annual Percentage Yield (APY), which determines the total amount of interest that you will gain each year on your crypto. So what is APY crypto meaning? What makes a good APY? Come with us, let’s walk you through.
What is APY in cryptocurrency?
The APY, short for annual percentage yield, is a standardized way to estimate the actual rate of return on crypto investments for just one year. Essentially, APY refers to the real rate of return gained on a crypto investment because it accounts for compound interest. On Bitmama for example, you can earn good APY interest on your crypto when you stake. Compound interest is added occasionally to the total investment, which increases the account balance and makes the next money gained from interest larger.
How to calculate APY in crypto
As stated in previous paragraphs, it is very important to note the frequency of compounding periods when calculating APY crypto meaning.
The formula for APY is:
APY= (1 + r/n )n – 1
r = period rate
n = number of compounding periods
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What is the difference between APY and APR?
The major difference between a crypto’s annual percentage yield (APY) and the annual percentage rate (APR) is that APY accounts for compounding interest, but the APR does not. Also, APR incorporates any fees or extra costs associated with the crypto investment transaction. In simpler terms, APR is estimated using simple interest and also includes fees.
In realistic terms, there is one crucial distinction that differentiates how APY and APR apply in crypto. Since APY accounts for compounding interest, the calculation will always yield a higher interest rate (a greater number). Hence, it is generally preferred when referring to something that will fetch people money. A good example of this is interest earned on a bank savings account. Contrarily, APR will be a much lower interest rate. Therefore, it is generally used for things that are likely to cost people money. An example is the interest rate on a mortgage or credit card.
What’s a ‘good’ APY to aim for?
This primarily depends on what you seek. Just like in the real fiat world, higher profits generally mean you have to make riskier investments. So if you see a crypto deal that offers you 30% or 40% APY, it may mean it’s a dubious or unsustainable deal.
Realistically, APYs have really declined a lot in the last few months. In the past, annual returns of 20% were commonplace, but now we’re generally seeing figures ranging between 5% and 10%.
This is a promising thing, as it suggests that the market is maturing. Traders, and projects, are far less desperate for effortless credit than before, which indicates we’re going into a more solid, sustainable phase.
Crypto Investments That Earn APY
While some crypto holders will just choose to hang onto their tokens and enjoy the upside possibility, more adventurous ones will vigorously use their cryptocurrency to earn greater returns.
One good investment route is staking. Essentially, stakers entrust a set amount of their crypto acquisitions to lock up safely and take out of general circulation for a predefined time. This affects supply, which in turn affects value.
Another good option is yield farming, which typically involves lending out your crypto acquisitions to others. Yield farmers shift their crypto assets within different marketplaces depending on the potential return.
To succeed at yield farming, it is important to constantly follow APY in order to determine the most valuable opportunities. This will give you a good idea of what options you have available and the most suitable one to invest in.
What does 7-day APY mean in crypto?
A seven-day APY is precisely what the name says it is. Essentially, It’s the annual return on a crypto investment in just over a seven-day period, which accounts for the impact of compound interest. A seven-day APY is a very common metric to compare different returns on short timeframe crypto investments.
What are the factors that influence crypto APY?
There are a number of factors that generally influence the APY that your crypto investments will fetch. Here are the major factors to be aware of:
1. Inflation
Inflation is a fundamental metric that can determine the variability of APY. The tokenomics of numerous blockchain networks are mainly inflationary. This implies that validators and miners are generally paid in newly minted tokens. In simpler terms, this means that the higher the rate of inflation on a specific blockchain, the higher the APY.
2. Compounding periods
Compounding periods cannot be left out of APY crypto meaning. Essentially, the total number of interest periods is the next significant factor that can influence the general APY of a crypto project. If the total number of compound interest periods generally increases, the APY will increase too.
3. Supply and demand
Like all other markets, actively trading in the cryptocurrency market is liable to the unseen forces of supply and demand. Hence, the APY differs depending on the level of demand for the crypto token in question as well as its liquidity. The liquidity refers to the availability of a crypto token on the crypto market at a specific time).
In simple terms, high demand naturally presses for a high APY. If a crypto investor gains more than 10% on lending a crypto asset, it indicates that other market players are ready to pay over 10% interest to borrow that coin.
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Why is the APY so high in cryptocurrency Vs. traditional investments?
Essentially, a high APY means that investors and other market players are in desperate need of quick cash. Therefore, they are happy to offer huge yields in order to get access to it. As a result of this, APY gets higher in crypto, as crypto investors are always seeking new ways to get access to fast lines of credit.
APY meaning crypto is regarded as the actual rate of return because just recording the interest rate over one year will not account for wide differences in the compounding period. However, when estimating your APY it’s worth taking note of inflation. If you invest in a crypto asset, which is then affected by inflation rates that exceed your APY, then your profits are being lost as fast as they’re earned. Another important thing to take note of is supply and demand. They may vary depending on the current amount of demand (and liquidity) that a specific cryptocurrency has.
As the best crypto exchange app in Africa, Bitmama offers a secure marketplace for crypto enthusiasts. Perform activities like crypto exchange, crypto staking, and creating virtual dollar or crypto cards for online payment. Get started today by downloading the Bitmama app on Android or iOS.
