APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are both financial metrics used to express the annualized return on investment, but they are calculated differently and serve different purposes.
In the traditional investing world, APR is typically used for borrowing rates and APY is typically used to calculate annualized returns. In crypto, however, they give information about the prospective profits of different investment opportunities.
APR is the return without compounding. It is frequently used to calculate loan interest rates or the yield produced by crypto lending services. APR is a straightforward interest rate that disregards the effects of compounding over time.
If a lending platform, for instance, offers a 10% APR, it indicates that the investor will receive $10 over the course of a year for every $100 deposited, regardless of how frequently the interest is paid out or reinvested.
On the other hand, APY takes the impact of compounding into account. When interest is compounded often and reinvested, the APY shows the real yield received on an investment. It gives a more precise picture of the overall return on investment.
APY is frequently used in the cryptocurrency industry to evaluate yield farming strategies and staking rewards. For instance, if a staking pool offers a 10% APY, it means that the investor would make 10% on their initial commitment and that the interest will be periodically reinvested or compounded, generating better overall profits than if rewards were not compounded (APR).
While APYs and APRs are great tools to forecast potential return on investment. They shouldn't, however, be the only elements taken into account when assessing investment opportunities. Risk, liquidity, fees and market circumstances should also be considered and must weigh heavily in the mind of any astute investor.
In conclusion, APY incorporates the compounding effect, whereas APR shows the annualized rate of return without it. Making informed investing selections requires taking both APR and APY into account in addition to other pertinent factors.
Disclaimer: any information provided by Foxify as part of the Academy is for informational/educational purposes only and not financial advice. Please always do your own research.