When it comes to investing your money in a decentralized finance or DeFi project, understanding APR vs. APY can make all the difference in choosing which platform is best for you.
It can impact your returns by hundreds or thousands of dollars depending on the size of your investment and the length of time you keep it locked up in a DeFi platform.
In this article, we’re diving into the difference between APR and APY, why you need to care, and how it can affect your ROI when investing in DeFi, crypto, and digital marketing for blockchain.
What is APR?
APR stands for Annual Percentage Rate and indicates the amount of interest you will earn over a period of one year. This rate is calculated on the principal balance of your investments in DeFi and blockchain companies.
If you invest $100 in a project that pays 25% APR, after one year, you will have $125 in your account.
The extra $25 represents your return on that investment.
What is APY?
APY stands for Annual Percentage Yield and indicates the total amount of interest you will earn over a period of one year, including compound interest.
This rate measures the actual value of your investments at the end of a period, taking into account all the interest accrued on your principal balance.
If you invest $100 in a project that pays 25% APY, after one year you will have $125 in your account, compounded with all the previous earnings from this investment ($1.04).
The extra $1.04 represents your return on that investment.
Why Should You Care About DeFi APR and APY?
The difference between them can be significant if you hold your money in a DeFi platform for longer than a year.
For example, suppose you invest $1,000 in a project that pays you 10% APR.
After one year, your investment will be worth about $1,100 (10% of $1,000). If you leave it there for another year, however, it will compound. Y
You’ll earn 10% on the original $1,000 and then another 10% on the extra $100 that you earned. That means your investment will be worth about $1,210 after two years (10% of 1,100).
If the platform were paying 10% APY instead of APR, you would end up with about the same amount at the end of two years ($1,210).
However, it would take just over three and a half years to reach that same amount if it paid 10% APR instead of APY.
Tips on Choosing a DeFi Platform Based on APR and APY
DeFi platforms offer you the chance to earn higher returns on your investment. Still, choosing a high-yield DeFi platform based on APR/APY alone is not sufficient for profitable crypto asset management in the UK.
Here are some tips to help you choose between different DeFi platforms:
- Decide if a platform is reputable and reliable. Is it a well-known platform with a proven track record? Check for things like regulatory compliance, security features, etc.
- Choose a DeFi platform with a high APR/APY
- Choose a DeFi platform with a relatively low minimum balance
- Consider fees, charges, lock-in periods, etc.
- Understand how the platform works and how it generates revenue (i.e., through currency exchange or lending)
- Analyze the risks involved with alternatives, such as peer-to-peer lending or cryptocurrency trading
- Read reviews and feedback from previous customers to decide if the platform is legitimate and trustworthy
- Compare different platforms before making your choice so that you can get the best deal
The more you understand what you’re doing, the better you can avoid these cryptocurrency investment mistakes, no matter what platform you’re interested in.
Get Personalised Advice on Your Crypto Investments
Unless you’re a crypto expert with large funds to experiment with different investment strategies, it can be risky to invest on your own.
As cryptocurrency asset managers, Key Coin Assets specializes in minimising risks while boosting the profits for all crypto investors – even if you have zero experience in this space.
Contact us today – we’d love to chat about your crypto investment goals and how we can help you get there faster!
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