APR: What it is and how to distinguish it from APY — A practical guide for crypto investors

Anyone starting to invest in cryptocurrencies through staking, lending platforms, or farming inevitably encounters two abbreviations: APR and APY. At first glance, they seem synonymous, but this is far from the truth. The difference between them can significantly impact your actual earnings. Let’s understand what these metrics actually represent and how to avoid overpaying due to misunderstanding their distinctions.

Why investors need to understand APR and APY

Imagine comparing two lending platforms. One offers 10% annual interest, and the other also offers 10%, but with monthly interest accrual. At first glance, there seems to be no difference, but by the end of the year, your income will differ. The reason lies in how these interest rates are calculated.

Choosing between APR and APY is not just about selecting a number. It’s about choosing between the actual income you will receive and what the platform promises. Misunderstanding these metrics can lead to inflated expectations or, conversely, to choosing less profitable investments.

What is APR: simple annual percentage rate

APR (Annual Percentage Rate) is the simplest of the two metrics. It’s just the annual interest rate on your investment, without accounting for the effect of compounding.

The formula is straightforward:

APR = (interest earned over the year / initial deposit) × 100

For example, if you deposit 1 BTC on a lending platform at 5% per year, you will receive 0.05 BTC by the end of the year — and that will be your 5% APR. Nothing complicated.

Where is APR used

In practice, APR appears in several scenarios:

Cryptocurrency lending — when you lend someone 10,000 USDT at 8% APR, you will receive exactly 800 USDT over the year, regardless of how often payments are made. The interest does not “compound,” it’s simply paid at the end of the period.

Staking without reinvestment — some validators and staking pools express rewards as APR. If you stake 100 ETH and receive rewards monthly but do not add them back into staking, you can calculate your income using the APR formula.

Simple financial instruments — where there is no automatic reinvestment of earnings.

Advantages of APR

• Transparency — you immediately see how much money you will earn in absolute terms
• Ease of calculation — no complex formulas
• Easy comparison — when all conditions are the same (the same payment frequency), APR allows quick selection of the best option

Disadvantages of APR

• Does not show actual income — when reinvesting earnings
• Misleading when comparing — two investments with the same APR can yield different results if interest is accrued at different frequencies
• Underestimates the benefit of compound interest — if income is automatically reinvested

APY: when interest starts earning interest

APY (Annual Percentage Yield) is a more accurate metric that accounts for the effect of compound interest, i.e., reinvestment of income.

If APR indicates “you will get this much money,” then APY says “considering that your income will be reinvested, you will get this much.”

The formula looks like this:

APY = ((1 + r/n)^n×t) - 1

Where:

• r = nominal annual rate (expressed as a decimal)
• n = number of compounding periods per year
• t = time (in years)

It sounds complicated, but let’s clarify with an example.

( Example calculation of APY

Suppose you invest $1,000 in a lending platform offering 8% annual interest with monthly compounding.

APY = )(1 + 0.08/12)^12×1 - 1 ≈ 0.0830 or 8.30%

Instead of the promised 8%, you will get 8.30%. The difference is small but present. The more frequently interest is compounded, the larger this difference becomes.

Let’s compare two lending platform options:

Option 1: 6% with monthly compounding
APY = ###(1 + 0.06/12)^12 - 1 ≈ 6.17%

Option 2: 6% with quarterly compounding
APY = ((1 + 0.06/4)^4 - 1 ≈ 6.14%

Although both promise 6%, the first yields 6.17%, and the second 6.14%. Monthly compounding is better due to more frequent reinvestment.

) Where is APY used

DeFi farming with automatic reinvestment — most DeFi protocols automatically add earnings back into the pool, so APY is the relevant metric.

Cryptocurrency savings accounts — when the platform accrues interest daily or weekly, this creates a compound interest effect.

Staking with automatic reinvestment — some validators automatically add rewards to the stake.

( Advantages of APY

• Realistic — shows the actual income you will receive
• Fair comparison — allows comparing investments with different accrual frequencies
• Transparency for long-term investments — the longer you hold, the more relevant APY becomes

) Disadvantages of APY

• More complex calculations — the formula is more complicated than for APR
• Potential confusion — some investors confuse APY with APR and expect higher returns than they actually get
• Less intuitive — not everyone immediately understands how it works

APR and APY: main differences summarized in a table

Practical guide: how to choose the right metric

If income is paid once a year and not reinvested → look at APR. Here, APR and APY are the same.

If income accrues frequently ###monthly, daily### and is reinvested → only APY. It provides a true picture of earnings.

If you compare two investments with different accrual frequencies → always convert both to APY; otherwise, comparison will be inaccurate.

If the platform only shows APR but promises frequent payouts → request an APY calculation or compute it yourself using the formula above. The difference can be significant.

Common investor mistakes

Mistake 1: confusing APR with actual income when reinvesting

The platform states “20% APR” with monthly accrual. You think you will earn 20%, but in reality, you will earn about 21.94% due to compounding. Good to know in advance.

Mistake 2: choosing an investment based only on APR without considering accrual frequency

Two platforms offer 10% APR. But one pays annually, the other daily. The second’s APY will be about 10.52%, the first exactly 10%. The difference is nearly 0.5% per year — significant for large sums.

Mistake 3: ignoring risks for high APR/APY

If someone offers 50% APY while the market average is 8-15%, that’s a red flag. High returns often mean high risk — up to losing everything invested.

Mistake 4: forgetting about fees

A platform promises 15% APY but charges 2% management fee monthly. Your actual earnings will be much lower. Always consider net income after fees.

Real-world examples: how it works

Example 1: lending at 10% APR

Lend 10,000 USDT at 10% APR without automatic reinvestment. After a year, you get 1,000 USDT. No complications — exactly 10% of your deposit.

Example 2: staking at 8% APY with daily accrual

Stake 10,000 USDT. Daily interest is accrued and automatically added to the stake. Thanks to compound interest, after a year, you will have about 8,320.91 USDT. The difference of $32 on $10,000 is a 0.32% additional income from the reinvestment effect.

Example 3: DeFi farming at 100% APY ###sounds fantastic, but such rates occur(

Deposit 1,000 USDT. 100% APY means the amount doubles to 2,000 USDT after a year. But remember: such figures are often unstable. It might be a temporary offer that quickly drops to 20-30%.

Final recommendations

1. Always clarify whether it’s APR or APY — this is the first question to ask the platform
2. If frequent accrual with reinvestment is offered, demand APY — only it shows the real income
3. Convert everything to APY for fair comparison — this is the only honest way to compare different investments
4. Don’t believe in overly high numbers — if something seems too good to be true, understand the risks
5. Calculate after fees — the stated APY / APR minus all platform fees

Understanding the differences between APR and APY is a fundamental skill for any crypto investor. These two metrics are equally important, just applied in different situations. The more accurately you use them, the more informed your decisions will be and the better your investment results.