What does APR stand for? The difference between APR and APY in the crypto world

APR stands for Annual Percentage Rate, which is the standard interest rate showing the annual return. APY stands for Annual Percentage Yield, which accounts for compound interest. Understanding the difference between APR, meaning “simple interest,” and APY, which is “compound interest,” is very important for smart crypto investing.

APR: The “Annual Percentage Rate” You Need to Know

APR means “Annual Percentage Rate,” which in Thai refers to “annual percentage rate.” It calculates interest straightforwardly. If you invest 100 baht at 5% APR, you’ll earn an additional 5 baht in the first year. No interest on interest is included.

This simple APR concept applies to borrowing money. If you borrow 100 baht at 5%, you’ll repay 100 baht principal plus 5 baht interest, totaling 105 baht after one year.

Types of APR You Must Know

There are two main types of APR in the market:

Fixed APR: The interest rate remains unchanged throughout the repayment period. You can predict the interest amount accurately regardless of market changes.

Variable APR: The interest rate can increase or decrease based on market conditions, depending on changes in the reference interest rate. Borrowers may pay more if the market moves unfavorably.

APY and Compound Interest: The True Return

APY stands for Annual Percentage Yield, which measures the return from compounding. It describes what you actually receive when interest is compounded on itself.

For example, if you invest 100 baht at 5% APY, you won’t just get 5 baht. The interest is calculated on the initial amount plus any accumulated interest from previous periods.

This difference may seem small, but over time, your money grows faster with APY than with APR due to “interest on interest.”

APR and APY in Crypto: Staking and Yield Farming

In crypto, APR refers to the return rate without considering compounding. It’s often used to describe yields from lending tokens on DeFi platforms.

Staking involves locking your tokens on a blockchain to support network functions (like Proof-of-Stake) and earning interest as a reward. Some platforms calculate staking rewards using APR or APY, depending on how often interest is compounded.

Yield Farming is an advanced investment activity where you provide your tokens to liquidity pools on DeFi protocols. Returns are often shown as APR or APY. Yield farming carries higher risks due to price volatility and smart contract risks.

Simple Calculation for Beginners

Basic APR formula: APR = P × T

• P = interest rate per period (percentage)
• T = time (years)

Example: If you invest 10 BTC at 6% APR for 1 year, you’ll earn 0.6 BTC interest, totaling 10.6 BTC.

APY formula (considering compounding): APY = (1 + r/n)ⁿ - 1

• r = annual interest rate (decimal, e.g., 0.05 for 5%)
• n = number of compounding periods per year

If you compound interest daily, APY will be significantly higher than APR because interest is calculated and added daily.

How to Compare: Real Investment Examples

Scenario: You have 10,000 baht and want to invest at 5% interest for 3 years.

Using APR only:

• Year 1: earns 500 baht
• Year 2: earns 500 baht
• Year 3: earns 500 baht
• Total interest: 1,500 baht
• Total amount: 11,500 baht

Using APY with annual compounding:

• Year 1: 10,000 × 1.05 = 10,500 baht
• Year 2: 10,500 × 1.05 = 11,025 baht
• Year 3: 11,025 × 1.05 = 11,576.25 baht
• Total interest: 1,576.25 baht
• Total amount: 11,576.25 baht

Difference: APY yields an extra 76.25 baht due to compounding over time.

Choosing APR or APY: Investment Tips

For investors (seeking returns):

• Focus on APY, as it reflects the actual yield.
• Consider how often interest is compounded (daily > weekly > monthly > quarterly).
• In crypto, some platforms compound interest daily, offering the highest returns.

For borrowers (paying interest):

• Focus on APR, as it shows the annual cost.
• Lower APR means lower costs.
• Avoid variable APRs due to the risk of rising interest rates when market conditions change.

Comparison Table: APR vs. APY

Summary: Why APR Is a Key Concept in Investing

APR stands for “Annual Percentage Rate,” measuring interest straightforwardly. APY stands for “Annual Percentage Yield,” which includes compounding effects.

For crypto investors, choosing platforms offering higher APY is better because it yields higher actual returns. Daily compounding interest provides the highest gains even with the same nominal rate.

Understanding these differences helps you make better investment or borrowing decisions and increases your chances of profit in crypto investments over the long term.