Many of the terms used in traditional finance are used in the cryptocurrency space. In many cases, similar terms mean roughly the same thing (think of the old ICOs vs. IPOs). One of the most important examples surrounds the development of lending and passive income opportunities in crypto.
The crypto industry has seen many new developments as it has entered the mainstream over the years. If you want to borrow cryptocurrencies or earn passive income through lending to others or staking, you need to understand APY.
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What is APY?
APY stands for annual percentage yield. Annual percentage yield is a measurement of the interest earned through any crypto investment.
You see, APY is used in a couple of products related to cryptocurrencies.
- Crypto Lending: If you want to earn passive income, you can go to a crypto lending platform and put up your crypto for lending. These platforms act as middlemen who connect you with borrowers. For providing the capital the platform uses to lend money to others, you are paid a part of the proceeds of the loan’s interest. For the lender (in this case is you), the interest is represented as APY.
- Earned Interest on Crypto: The other major way to earn a passive crypto income is through staking. When it comes to your compensation for staking your cryptos, APY is also the standard measurement.
Regardless of where APY is used, it offers the same basis for interest.
How Does APY Work?
APY is the measurement for the rate of return provided over the course of one year on one investment.
Simply put, APY is the annualized measurement for return on investment.
Annual percentage yield is oppositely used in cryptocurrency as APR in traditional finance. APY is your fixed rate of return over the specified period of time (one full year).
Let’s say you provide 100 Bitcoin to a crypto lending platform at an APY of 5%. After one year, you would have 105 BTC. However, the platforms typically take some small fees meaning you should expect to have slightly less than 105 BTC at the end of the year.
The critical thing to remember is that APY, as the name suggests, is always an annualized representation. Over one full year in the example above, you gained 5%. However, payments are often made to you every month. In this case, the rate is broken down from its annual rate.
What Can Affect APY?
Several factors can change the average APY for a given cryptocurrency investment.
Supply and Demand
Market forces rule APYs, just as they rule the USD price of cryptocurrencies and everything else in the crypto economy.
As an example, imagine that for whatever reason, high demand for ETH loans exists, but ETH is in low supply on lending platforms. Lending platforms, therefore, would want to entice users to provide more ETH for loans. The primary way to do that is by increasing the APY they payout to users willing to provide the currency.
This is a simplified example, but the supply/demand relationship plays out across all crypto APY offers.
Invest in over 30 cryptocurrencies from your checking account with no trading fees with the Current mobile app crypto feature.
Titan is an investment platform with a team of experts actively managing your portfolio based on your chosen strategy, including cryptocurrencies.
Alto IRA allows you to invest in stocks, bonds, mutual funds, ETFs, real estate, cryptocurrencies, and even gold for your retirement.
Inflation
Inflation plays a role in determining crypto prices and APY rates. Each crypto has what we can refer to as an “APY value”. Some cryptos have significantly higher APYs than others, which is often reflected across the platforms offering APY-based interest.
Compounding Periods
APY rates always include the effects of compound interest. This is because compound interest can easily mean more profit for the recipient. So, naturally, the more compounding periods there are, the better the APY.
What Is APY in Crypto?
APY matters in several activities that are important to the crypto economy.
Crypto Staking
Some crypto platforms offer a way for you to make passive income called staking. Staking typically comes with a minimum balance. If you deposit that minimum balance or more, you are locking in your cryptocurrencies with the platform. The balance is put into the crypto network as a stake, which is like a security deposit. The size of your stake increases the node’s ability to form the next block.
For your part in staking towards the expansion of the blockchain in question, you profit from your stake. Your profits are measured in APY rates.
Crypto Lending
If you want to make passive income through lending platforms, you can lock your cryptos in with them for a specified period. Your compensation for supporting the platform is a profit calculated by the APY.
Crypto Borrowing
Usually, the platforms where you provide the capital for crypto loans are also where you can get crypto-backed loans. You need to have cryptocurrencies to provide as collateral for the loan. Loans are generally offered in major fiat currencies or stablecoins.
Crypto Earning
Some platforms offer even more straightforward ways to earn passive income. Some platforms allow you to earn interest on your crypto, which provides high APYs by simply storing idle digital assets in their account.
