What does APR mean in cryptocurrency and why is it not the same as APY

If you invest in cryptocurrencies, you have likely encountered two terms: APR and APY. Both promise to show your potential returns, but in reality, they are completely different metrics. And here’s the catch — choosing the wrong one can cost you real money. Let’s understand what APR means in cryptocurrency and when to use each indicator.

APR: Simple and Straightforward

APR (Annual Percentage Rate) — this is the most understandable metric. It shows the percentage you will earn over a year without considering reinvestment. It’s calculated simply: if you lend 1 BTC at 5% per year, you will earn 0.05 BTC profit after a year. Period.

The formula is elementary: APR = (Interest for the year / Principal) × 100

On lending platforms and staking without automatic reinvestment, APR is used. For example, if you deposit 100 tokens with an APR of 10%, you will get exactly 10 tokens annually. No surprises.

When APR is suitable for you

• Fixed-rate short-term loans
• Staking where rewards are not automatically reinvested
• Quick comparison of offers with the same accrual scheme

Why APR can mislead you

APR does not account for the effect of compound interest. This means that if your earnings are automatically reinvested, you lose some potential profit due to hidden accruals. Investors often mistakenly think that 10% APR equals the same as 10% real annual yield, but this is only true for simple interest.

APY: The Real Picture of Your Income

APY (Annual Percentage Yield) — this is what you actually earn if your income is reinvested. It accounts for compound interest, meaning interest is accrued both on your principal and on the already accumulated interest.

The APY formula looks like this: APY = ((1 + r/n)^n×t) - 1

Where:

• r — nominal rate (in decimal form)
• n — number of reinvestment periods per year
• t — time in years

( Example calculation

You invest $1000 in a platform with 8% annual interest compounded monthly:

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

See the difference? 8% APR turns into 8.30% APY thanks to monthly compounding. It may seem small, but over large sums or over several years, it becomes significant.

( Frequency of payments — the king of APY

The more frequently interest is paid, the higher the APY. Let’s compare two platforms:

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

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

The difference of 0.03% may seem tiny, but over a year on $10,000, it already results in )additional income.

Where APY is used

• Crypto farming on DeFi platforms with automatic reinvestment
• Savings accounts with daily interest accrual
• Lending platforms where earnings are automatically added to the principal
• Any investments where interest is compounded on interest

Direct Comparison: APR vs APY

Practical mistakes investors make

Mistake 1: Confusing APR with APY when choosing staking

A platform says “20% APR” — sounds great, until you realize it doesn’t compound daily. The actual APY might be lower, especially if payouts are infrequent.

Mistake 2: Ignoring the frequency of accrual

Two platforms offer the same percentage, but one pays daily, and the other quarterly. The first is always more advantageous due to more frequent reinvestment.

Mistake 3: Forgetting about risks at high rates

If the yield sounds unrealistically good, it probably is. High APR often signals increased risk, platform instability, or outright scams.

How to make the right decision

Choose APR if:

• Rewards are not reinvested
• Comparing loans with the same structure
• You need a simple and understandable metric

Choose APY if:

• Earnings are automatically added back into the investment
• Comparing several options with different accrual frequencies
• You want to see the real, not theoretical, yield

In practice: use both metrics in parallel. First, check APR (this gives a basic understanding), then find APY (this shows the final number you will actually receive).

Examples in the context of cryptocurrency investments

$30 Crypto farming You provide liquidity on DEX. The platform shows 100% APR, but with daily reinvestment, it can be 170%+ APY. That’s why farmers look at APY — it’s what they actually get ###before gas fees and risks(.

) Ethereum staking Validator nodes earn rewards that are automatically added to their stake. Even if the base rate is 4% APR, with daily compounding, the actual yield may be closer to 4.08% APY.

( Lending on platforms You lend USDC at 5% APR. If interest is paid monthly and you do not reinvest, you stay at 5%. But if interest is added to automatic staking, after a year you get about 5.12% APY.

Why this matters for your portfolio

The difference between APR and APY may seem small in the short term. But over several years on large sums, it adds up:

• Investment )000 over 5 years at 10% APR = ###000
• The same investment at 10% APY with monthly compounding ≈ (470
• Difference: )470 — no joke

Now imagine several crypto investments over a 10-year period. This difference becomes incredibly significant.

Summary: choose the metric based on context

APR and APY are not enemies; they are complementary tools. APR shows the simple rate, APY shows the real result considering compounding. Understanding what APR means in cryptocurrency and how it differs from APY is key to making informed investment decisions.

Before any investment:

1. Clarify whether APR or APY is offered
2. Understand if earnings will be reinvested
3. Calculate APY yourself if only APR is indicated
4. Compare several options using one metric ###it’s usually better to compare APY###
5. Remember about risks — high returns require verification

Invest consciously, and your portfolio will thank you.