As you surf in the world of crypto, there are many abbreviations you come across. A couple of them are APR and APY for sure if you are into passive income. Let's take a look at what are these, and how one differs from another.
Before we dive into that let's have a quick reminder with some easy examples just to jog our memory. 10% means 10 / 100 = 0.10 = 0.1
15% = 0.15
50% = 0.5
100% = 1
10% of 1000 is 1000 * 0.10 = 100
Let's say we have a $500 and 12% APR means it yields 500*0.12= $60 in a year
12% APR yields 1% in a month for $500 which is 500*0.01= $5
12% APR yields 0.034% in a day for $500 which is 500*0.00034= $0.167
APR, means Annual Percentage Rate which is self-explanatory. It simply specifies the total rate in a year. If monthly rate is 2% than the APR is 24% (0.02*12=0.12). Let's say you decided to earn interest for your idle cryptocurrency in an exchange. The exchange claims that it gives a 10% APR for that cryptocurrency. That means you earn 10% in a year or 0.834% in a month or (10/360) 0.0278% in a day. It yields these rates for every day, month or year. It doesn't take the compounding amount into account which is the key difference between APR and APY.
APY, means Annual Percentage Yield. When calculating APY you need to take the earning or interest ratio into account for the next period. Let's say the monthly interest rate is 3% and you have $1000. In terms of APR, it is simple 3*12= 36%. But after the 1st month, we put our $30 earnings into the main account and for the second month we earn 3% of $1030 instead of $1000, and so on and so forth. The formula for APY is: (1 + APR/12)^12 – 1
Here is an example below assuming we have $1000 and a 1% monthly rate
So we have $1000 and a 3% monthly rate and APR is 36%. In this situation, if we want to take the earnings of each period into account we use APY.
(1+ 0.36/12)^12 - 1 = (1+0.03)^12 -1 = (1.03^12)-1 = 0.42
With the compounding earnings, the APY is 42% whereas the APR is 36%
Whereas the monthly interest rate is 1% your bank probably gonna tell you that "Hey look we have a 12.68% APY wow!" instead of APR which is 12%. Like they are going to give you more money. And likewise, when they are giving you credits they probably use APR instead of APY which sounds as if you are going to spend less money. Don't be taken unawares.
Thank you for reading. I hope, you enjoyed it and/or it helped you somehow.
Have a nice day :)
