APR and APY for Comparing Crypto Investment Returns
Summary
The document explains how APR and APY describe returns from crypto lending, staking, and yield farming. APR expresses a simple annualized rate and does not include interest earned on previously accrued rewards. APY incorporates compounding and the frequency of reinvestment, so it is more useful when comparing opportunities whose rewards compound at different intervals. The article gives formulas and examples, including monthly compounding, to show why APY can exceed the stated APR.
It recommends APR for simple-interest products or rewards that are not reinvested, and APY for compounded returns. The distinction helps make quoted rates comparable, but neither measure alone establishes that a return is sustainable or that an investment is safe. The article notes that unusually high APRs may reflect elevated risk or temporary incentives, yet its discussion of platform, token, and strategy risks is limited. Quoted rates should therefore be read alongside the terms governing reward variability, reinvestment, and the underlying investment.
Key ideas
- APR annualizes simple interest without accounting for returns on accrued interest.
- APY reflects compounding and depends on how frequently returns are reinvested.
- Use APR for simple-interest products and APY to compare compounded returns.
- More frequent compounding can produce a higher APY from the same nominal rate.
- Neither APR nor APY measures the safety or sustainability of a crypto investment.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.