Cryptocurrency, nicknamed crypto by its legion of users, is a form of digital currency that is devoid of intermediaries, such as banks and governments.
This digital currency is extremely secure and reliable. Plus, it allows for convenient financial transactions.
Numerous functions allow you to keep an eye on your crypto finances. Among them is APY.
What does this mean? How can it be used?
Continue reading to find out.
What Is APY In Crypto?
APY is an acronym that stands for annual percentage yield. Essentially, this is how much money you have made in the space of the year measured in the form of a percentage.
This makes APY similar to APR (annual percentage rate), though they are measured differently.
By using APY, you can calculate the compounded interest that your finances have acquired throughout the year.
What Is Compounded Interest?
Compound interest is a financial term that refers to the interest that you have acquired on top of the current interest.
As a result, many people think of it as meaning “interest on top of interest.”
This links to APY as it is a way of measuring whether this percentage yield is compounded.
If so, then these finances will also earn money. Compounded finances can earn you tons of money.
If you are unfamiliar with compound interest, there are a few different techniques to calculate this figure.
For simplicity’s sake, you may want to utilize a compound interest calculator, which can easily be found online.
These sites take the hassle out of determining compound interest.
How Is APY Calculated?
All you need to do to calculate this percentage is use a simple formula. Namely, this formula is:
APY = (1 + r/n)n – 1
In this formula, the “r” refers to the annual interest rate. Meanwhile, the “n” stands for the number of compounding periods per year.
While this equation might seem intimidating to some, we promise it can be a simple formula once you have got to grips with it.
If you are still unsure of how to use this formula, feel free to consult an accountant or someone who works in financing.
From the perspective of an investor, the APY is often calculated by the account itself. In the world of banking, it is the bank’s job to work out the APY.
Thus, you won’t have to use this calculation yourself.
In the case that this job falls on you, a spreadsheet can be utilized to complete this calculation. Moreover, you can find online APY calculators that do the work for you.
Why Does APY Matter?
If you are unsure of where you should be investing your crypto, accounts with high APY will be a good place to start. The better the annual percentage yield, the faster your finances will increase.
One thing to bear in mind is that investing based on APY can be somewhat risky.
If you find an investment opportunity with a ridiculously high APY, such as 1000%, this could be an indication that it is a scam.
As a result, you should lower your expectations when basing an investment on APY and make sure that you do lots of research.
APY Vs APR
As mentioned, APY and APR are considered similar ways of measuring finances. Standing for annual percentage rate, APR is different from annual percentage yield.
APR determines how much interest an account has accumulated. This figure also includes the fees that require payment.
As a result, these figures calculate different figures. Another key difference is that while it is beneficial for the APY to be a high number, the APR should be as low as possible.
If your APR is high, it will mean that you could owe a lot of money. In contrast, the APY should be high as it demonstrates that the account can earn a lot of money.
Because they have different functions, different formulas are used to work out APR and APY.
In terms of similarities, both APR and APY are measured in percentages. This is indicated by their names. They are also both formulas that are essential in financing, particularly when it comes to the world of cryptocurrency.
Therefore, if you want to know more about cryptocurrency, you should learn as much as you can about both APY and APR.
The increasing popularity of cryptocurrency means that there is lots of guidance regarding these two formulas.
What Is A Good APY?
You should opt for an APY that is as high as possible whilst also avoiding ones that seem unusually high.
In terms of banking, you should look for a savings rate that is at least 0.4% APY. For crypto, you should aim for around 5% APY.
Frequently Asked Questions
How To Tell If Something Is A Cryptocurrency Scam?
If something looks too good to be true, then it might look like a cryptocurrency scam. Any investment that guarantees a return is untrue.
This is because there is no way of foreseeing how much something will make. Prices can increase and decrease dramatically. Therefore, profits are never certain.
Also, if you are seeing tons of advertising, this could be an indication of a scam.
While marketing is beneficial to all businesses, scammers use immoderate marketing to reach a large number of people quickly.
Therefore, if you are unable to escape advertising for a crypto business, it could be dodgy. Finally, if an account pledges to give you money for free, then it is best to avoid it.
Is It A Good Idea To Invest In Crypto?
Yes, it can be a beneficial experience to invest in crypto. Many people have experienced huge financial boosts after using cryptocurrency, such as Bitcoin.
However, as with many investments, you should bear in mind that this can be a somewhat risky industry.
Consequently, we suggest doing your research before entering the world of cryptocurrency.
Ultimately, APY is a complicated concept, especially if you are new to cryptocurrency. Yet, it is an essential way of measuring finances.
Hopefully, this guide has expanded your understanding of APY and allowed you to better comprehend its importance to crypto investments.