Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
You read that correctly; an APY on crypto investment can be significantly higher.
Read on as Pluto uncovers more about APY in crypto and how it affects crypto assets.
What Is APY in Crypto?
Today, banks may boast that investing with them will grow your money with their APR, APY rates, and compound interest. If that sounds exciting, it is essential to know what APY is and how it affects investments.
APY is the annual percentage yield on an investment or, in other words, an interest rate that you can earn on your account balance yearly by just allowing your money to sit there.
APR is defined as the annual percentage rate and differs slightly from APY.
In all honesty, these rates are meager and average between 0.01% to 0.24%. If you make an initial deposit of $1,000 into your traditional savings account, the APY you will earn at the end of the year is 1 cent.
APY works the same way in cryptocurrencies like ETH, Bitcoin, and DeFi liquidity pools as they do in traditional finance. The difference is the amount of interest; or, more specifically, the rate of returns.
For example, if you invest $1,000 USDT into your crypto account at 5.00% APY, you will earn $50 USDT at the year date mark from your initial deposit.
The same works for APY daily, weekly and monthly. Now, doesn’t that sound more enticing?
What Does 7-Day APY Mean in Crypto?
Banks have used the outline of compounding interest monthly.
Crypto lending platforms offer even shorter compound periods, where 7-day APY is the most popular.
These 7-day APY periods are attractive to investors for a few different reasons:
- Cryptocurrency markets are highly volatile and risky for some investors. Investors can mitigate the effects of sudden price movements with shorter compound periods.
- Investors can ensure that their annual percentage yield, which is claimed by the financial institution they are working with, is not manipulated.
- A shorter period of time for compounding can be attractive to newer investors who want to experiment with trading with crypto and get their feet wet in a shorter amount of time.
Other standard compounding periods include 14 and 30 days. APY is still calculated every year.
How Can You Calculate APY in Crypto?
The best and surest way to calculate APY in crypto would be to use an APY calculator or, more specifically, a crypto APY calculator.
If you are staking your crypto, you can use a crypto APY staking calculator.
What Is Staking in Crypto?
Crypto staking can be considered as holding your cryptocurrency funds in a secured crypto wallet and thus supports the functionality of a blockchain operative.
As a stakeholder, you are locking your crypto assets in this wallet with the assurance from the platform that you will gain some sort of reward in return. You can think of this as a crypto savings account in which your APY will translate into interest paid or accruing more of your desired crypto asset upon each period without adding additional funds (if you prefer).
This concept of staking in crypto can serve similarly to having a savings account with a bank, where you are earning interest on your deposits. This is another form of an APY in crypto.
Usually, each available project can resonate with you, create familiarity, and ultimately serve the ecosystem. So along with gaining income from your crypto investment, you are helping the ecosystem, which makes it all the more worthwhile.
What Are the Best Platforms for Earning APY in Crypto?
Coinbase Earn boasts up to 5.75% APY on your crypto investments.
You must hold eligible assets on this platform, investing as little as $1 to start. You can manage your account through their Earn center, and you can choose to opt out at any time.
2. DeFi Swap
DeFi Swap is a relatively new decentralized exchange hosted by Binance Smart Chain and rated highly amongst crypto investors.
The specific APY offered by DeFi Swap depends on the tier you choose. The four tiers offered are:
Bronze: 30-day lock-in, 30% APY
Silver: 90-day lock-in, 45% APY
Gold: 180-day lock-in, 60% APY
Platinum: 365-day lock-in, 75% APY.
As you can see, DeFi Swap offers exceedingly higher APY rates as compared to traditional banks.
Hosted by Crypto.com, Crypto Earn is a crypto savings platform that yields up to 5.2% on crypto holdings in their accounts.
With their digital app, you buy, sell and stake 37+ cryptocurrencies and stablecoins, calculate your potential earnings with their reward calculator, and compare reward rates.
Along with the previously listed platforms, Bitstamps hosts Bitstamp Earn, where you can easily own crypto and earn staking rewards.
Their website seamlessly breaks down how you can stake your crypto to make your assets work for you and constantly update their current rates per token.
The first step is to choose your crypto by using your existing crypto holdings or purchasing new crypto assets.
Currently, the only available cryptocurrencies for staking are Ether at 4.5% APY and Algorand at 1.6% APY.
Then, you choose the way you wish to earn. Some cryptocurrencies automatically grant rewards, while others require a minimum amount of assets to earn.
The last step is to simply sit back and allow your crypto holding to give you passive income.
What Factors Influence APY in Crypto?
When it comes to any type of savings, inflation plays a significant role. Since inflation refers to the overall increase in the price of goods and services, your dollar loses buying power, and any investor may have fewer funds to allocate toward investing.
Regarding staking in the crypto space, it is more appealing to most due to its low inflation rates. As inflation can directly affect your returns, it is essential to note the inflation rate of each coin you hold.
Supply and Demand
If a particular coin is in high demand, the interest you earn on that coin will typically be higher, and vice versa — if the coin you hold is abundant in supply, your APY will be lower.
When it comes to borrowing crypto, the same concept holds weight. The interest rate charged for borrowing a coin in high demand will be higher than the interest rates for borrowing a low-demand coin.
Put simply, APY in crypto is variable and directly affected by each coin's supply and demand.
APY increases as the number of compounding periods increases. Again, compounding periods have nothing to do with simple interest rates.
For both fiat currencies, such as the dollar or the euro, and cryptocurrencies, like Bitcoin (BTC), Ethereum (ETH), or USD Coin (USDC), annual interest rates grow more complex with compounding. The more something is compounded, the larger it grows, and that goes for investments.
If something is compounded daily, the APY will be higher than something compounded monthly. It is just the rule of how compounding works; as something compounds, there is more to work with every time the new compounding period begins.
What Are the Advantages of Earning APY in Crypto?
In the crypto world, there are some considerable advantages to note when earning APY.
One of the most significant advantages is the frequency of compounding. Since APY considers the compounding interest, you will see greater rewards and return on investment with each compounding period.
Another advantage is the rate at which cryptocurrency appreciates. Since crypto can appreciate rapidly, your rewarded interest rates may be higher.
What Are the Risks of Earning APY in Crypto?
There are many benefits to earning APY in crypto but a few risks.
The most prominent risk investors have to consider is the extreme volatility in the crypto market. Even though this is the exact reason for greater appreciation, it is also the reason for rapid depreciation. This means that your initial crypto investments can shrink in value with depreciation over time.
Another risk to note is the newness of cryptocurrency. Due to this newness, many emerging crypto exchanges and platforms have not smoothed out their processes and kinks. So when you decide to invest, invest in an exchange with an excellent running track record.
The Bottom Line
APY is found in traditional savings accounts as well as in cryptocurrency accounts. When considering conventional bank accounts, the annual percentage yield is often meager compared to annual percentage yields from cryptocurrency exchanges.
Are you considering opening a savings account or staking crypto assets with a reliable cryptocurrency platform? Look no further than Pluto! Visit our website today or check out our YouTube for more information on how to start staking.