How APY in cryptocurrencies becomes the main tool for earning: a practical guide

In the context of growing interest in passive income from digital assets, understanding the annual percentage yield (APY) has become an essential skill for any crypto investor. This material covers all aspects of APY in the context of cryptocurrency investments — from basic calculation mechanisms to practical application of various yield-generating strategies.

Basics of APY: what investors need to know

The annual percentage yield (APY) is a measure of the profit an investor earns over a year, accounting for the effect of compound interest. Unlike simple interest rates, APY reflects the actual income due to multiple interest accruals on already accumulated profits.

The mechanism is simple: if you deposit funds at a certain interest rate, interest is accrued not only on the initial amount but also on previously earned interest. This compounding effect (of compound interest) allows your capital to grow exponentially, not linearly.

For example, with a $10,000 deposit at 6% annual interest, you will receive $10,600 after one year. However, if the same bank compounds interest monthly, the final amount will be $10,616.78. The difference seems small, but over longer periods or larger sums, it becomes significant.

APY calculation method: formula and examples

APY is calculated using the following formula:

APY = ()(1 + r/n)^n - 1

Where:

• r — nominal interest rate (declared percentage)
• n — number of compounding periods per year (annually, monthly, daily, etc.)

This calculation considers the impact of compounding frequency on the final income. The more frequently interest is compounded, the higher the APY at the same nominal rate.

A practical example demonstrates the importance of this indicator: an investor choosing between two offers with the same nominal rate of 6% will get different returns depending on whether interest is compounded once a year or twelve times a year.

APY vs APR: critical differences for investors

Many confuse APY with APR (annual percentage rate), although these are fundamentally different metrics:

APY accounts for compound interest and shows the real annual return. This indicator is ideal for long-term investments where the effect of compounding is fully realized.

APR does not include the effect of compound interest and only reflects the basic annual rate with fees and other expenses. APR is often used in calculating loan payments and short-term financial operations.

The main difference can be summarized in one phrase: APY shows what you will actually receive, APR shows what they told you at the start.

How APY works in the world of cryptocurrencies

Cryptocurrency APY significantly differs from traditional banking. Instead of earning interest in fiat currency, the investor receives income in the form of additional tokens.

If you invest 1 Bitcoin at an APY of 6%, after a year you will have 0.06 BTC — regardless of the Bitcoin’s value at the start or end of the period. This means that profit from crypto investment is measured by the amount of assets, not their monetary value.

This approach makes crypto investments potentially more profitable in rising markets and less attractive in falling ones. If Bitcoin drops by half, your 0.06 BTC will be worth half as much in monetary terms, despite the earned income.

Main ways to generate APY in the crypto sphere

There are several proven methods of earning passive income:

Staking involves participating in network validation based on Proof-of-Stake. Token holders lock their funds in the network, helping verify transactions and earning rewards. The more tokens locked, the higher the chance of being selected as a validator.

Liquidity farming — providing two cryptocurrencies to a decentralized exchange. For example, you deposit ETH and USDC into a pool, helping other traders make swaps and earning a share of the fees. Such pools often offer especially high APYs but require understanding the risks.

Crypto lending — providing your tokens for a loan via centralized platforms or decentralized protocols. You earn interest from borrowers who use your funds for trading or other purposes.

7-day APY: why the crypto sphere prefers short periods

Most crypto platforms use a 7-day accrual cycle instead of a traditional monthly or yearly cycle. This is due to several reasons:

Cryptocurrency volatility requires more frequent recalculations of metrics. Weekly accrual allows for a more accurate reflection of market changes.

Shorter cycles give investors greater confidence that the platform truly fulfills its promised conditions, without manipulation or hidden fees.

Beginners are attracted by frequent payouts — they can see their assets grow every week, which psychologically motivates further investing.

The formula for calculating 7-day APY:

7-day APY = ((A - B - C) / B) × 52

Where:

• A — value at the end of the week
• B — value at the beginning of the week
• C — weekly fees

This allows investors to forecast what the annual return will be based on weekly results.

Factors affecting APY in cryptocurrencies

Token inflation

Every cryptocurrency has an embedded inflation mechanism — the regular creation of new tokens. If the inflation rate exceeds the offered APY, the investor effectively loses purchasing power despite earning interest.

Supply and demand ratio

As in traditional economics, interest rates depend on how in-demand the token is. When supply is scarce, interest rates rise; when there is excess, they fall. This means that the APY of a crypto project can change sharply depending on its popularity.

Compounding frequency

More frequent interest accrual creates a stronger effect of compound interest. Daily accrual is always more advantageous than annual at the same nominal rate. That’s why it’s important to clarify the conditions of accrual, not just look at the stated percentage.

Why crypto APY is higher than in traditional finance

The gap between crypto and bank interest rates is striking: the average American bank offers 0.28% on savings accounts, while crypto platforms offer from 5% to 20% depending on assets.

This is explained by several factors:

Less regulation — crypto platforms operate in a less strict regulatory environment, allowing them to take on more risk and offer higher returns.

Increased volatility — inherent risk in cryptocurrencies requires higher compensation for investors willing to hold such assets.

Liquidity concentration — a few major players control the crypto lending market, setting higher rates than in distributed traditional financial systems.

Important risks that cannot be ignored

Despite attractive APY figures, crypto investments carry significant risks. Impermanent loss (impermanent loss) in liquidity farming can completely wipe out expected profits if token prices move unexpectedly.

Additionally, high APYs are often offered by new or risky projects that may lose value or disappear altogether. Investors must assess the risk, not just the profit.

Final recommendations

APY in cryptocurrencies is a powerful tool for generating passive income but requires a conscious approach. Compare APYs across different platforms, consider compounding periods, evaluate project risks, and remember that a high APY does not always mean a good investment.

Regularly monitor APY changes, as these rates depend on current market conditions. Diversifying income sources and understanding compounding mechanisms will help you maximize the benefits of crypto APY when investing.