What is APY in Crypto and How Does It Work?

According to some research, 21% of survey respondents said they had used or invested in cryptocurrency.

If you’re considering crypto trading, you should also be aware of APY in crypto. But what is APY in crypto, and how does it affect you?

Keep reading to learn everything you need to know about managing APY in crypto.

What Is APY in Crypto?

Annual percentage yield (APY) is a cryptocurrency savings account, similar to an annual percentage rate (APR) account that you might have as a regular savings account.

When you open this APY account and connect your digital wallet, you can put your Bitcoin or another cryptocurrency in there and get a fixed rate of return the longer you keep your money there. The APY is just a method of calculating how much you’ll earn in a money market account.

This method is a way to track how much interest you can accumulate over time. The interest that you’ll earn is also called compound interest. The cryptocurrency you put into the account is called the principal amount.

The compound interest is a combination of the interest and the principal amount in addition to how much was gained over the year. Many people APY to invest their money because it makes it possible to make more money over time.

This will be the perfect option if you’re a crypto investor who wants to hold onto the coin but still make money. There are many different crypto yield accounts that you can set up, but ensure that you do your research before you choose one.

You’ll want to consider different factors, like entrance barriers, fees, types of crypto assets you can hold, and the procedure for earning interest. Of course, these will all vary depending on which platform you choose.

How Does It Work in Crypto?

If you have a 7-day APY, this is an annual yield using a 7-day return. You can calculate this by taking your crypto assets’ net difference price from seven days ago.

For example, You would take the price at the end of the seven days and subtract it from the price at the start of your 7-day period. Then, you would also deduct any fees you had for the week.

Take that number and divide it by the price at the start of your 7-day period. Once you have that number, you can multiply it by 365/7.

Then you’ll have your APY rate. This rate can help you understand if you have an excellent weekly yield return or not, which in turn factors into your annual rate.

What Is a Good Crypto APY?

When looking for a good APY account, you’ll want to choose one that gives you the highest earning potential. Many cryptocurrency projects will offer an APY of over 1%. There are even some projects that will provide 100% APY.

You’ll find that the APY rates are very competitive. However, you’ll also want to check the terms and conditions. For example, you may have to lock your money in for a specific time, and if you need your asset immediately, you might need help to take it out.

You’ll also want to see how the transaction fees affect the APY rate. If the transaction fees are low, switch between different platforms to maximize your earnings.

However, you’ll want to ensure that the project you choose to invest in is sound. If it’s not, you could lose more money than you’re making.

Why Is It So High?

Around the world, the APYs used in crypto is constantly changing. Therefore, the APY you see is often just an estimate because many factors cause it to change throughout the year.

For example, if the demand for one crypto asset is high, the interest rate and APY will also change. Conversely, the interest rate and APY will suffer if the demand for crypto is low.

However, the blockchain protocol can also factor in calculating the APY. Sometimes the compounding period will be different for each project. For example, if mined block per block, some may still work through time frames. If you have a higher number of compounding periods, you’ll have a higher APY.

Some of the higher APY offerings come from liquidity mining or yield farming. Users can provide liquidity into these pools and lend their tokens to others if they want to see the highest yield and money back.

Factors That Affect Crypto APY

The crypto APY can change annually, depending on inflation and supply and demand.

When inflation happens for crypto, new tokens add to the blockchain at an undetermined rate. However, cryptocurrency’s very design aims to be unaffected by inflation.

But the inflation rate at one network can affect the returns in your staking. For example, if your crypto coin is dealing with higher inflation rates than your APY is, then your coin is losing money.

The interest is earned based on the crypto’s popularity with supply and demand. That means that the market determines many of your crypto APY rates.