What is APY in Crypto and How Does it Work?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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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.

  1. 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.
  2. 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.

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.

Nexo Crypto Wallet App

9223 Reviews
Learn how to use the Nexo crypto exchange to sell, buy cryptocurrencies and earn passive interest on your digital assets.
9223 Reviews
Learn how to access Nexo crypto loans through this crypto wallet app to borrow cash or stablecoins using your crypto as collateral.

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. One intriguing example of earning interest on your crypto is Nexo, which provides high APYs by simply storing idle digital assets in their account. They offer up to 17%, including compound interest for simply storing crypto. They also don’t surprise you with fees, and they pay you daily. 

How to Earn Interest On Your Crypto

Nexo offers a fast and straightforward way to start making generously high APY interest rates. You can also use Nexo’s cryptocurrency exchange and swap cryptos on the same platform. All you need to do is stake it in your crypto wallet to earn interest. Then, you can use the Nexo Card to make purchases while also earning cashback rewards. Lastly, you can collateralize your cryptos to get a Nexo line of credit to borrow fiat cash or stablecoins.

To get started, you need to follow a few steps:

  • Visit Nexo’s website.
  • Click “Create Account” and follow the prompts.
  • Acquire cryptocurrencies to put into your Nexo wallet.
  • Sit back and let your cryptos accumulate interest with zero effort.

Nexo is a great way to start earning interest on your cryptocurrencies by simply stalking them, as well as accessing a platform to use your digital assets in many ways.

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