The Annual Percentage Rate (APR) of a cryptocurrency refers to the estimated profits or rewards that you will receive over a specific timeframe.
In the traditional financial market, the annual percentage rate (APR) is a calculated estimate of the total annual cost of repaying a cryptocurrency loan, including the amount of interest that you are required to pay. This amount is expressed as a percentage, rather than an amount.
However, in the cryptocurrency world, the APR is usually used as a tool by a potential lender to calculate the rewards that they should receive in cryptocurrency over a certain period of time for lending their cryptocurrency to a borrower. Individuals making use of cryptocurrency loan services as either a borrower or a lender will typically do so through a cryptocurrency exchange or blockchain-based platform than directly wallet to wallet.
Even though it says ‘annual,’ the APR is calculated daily based on current metrics, meaning that the estimated annual returns will change daily. Similarly, it does not mean that the cryptocurrency needs to be staked, invested or loaned for a full year, only that if the amount of cryptocurrency that has been put towards these functions is kept there, then that is the expected annual return that the investor should make within a year, based on that day’s calculations.
APY vs APR – What’s the Difference?
An annual percentage yield (APY) itself refers to the rate of return gained over the annual investment period for a specific cryptocurrency investment. It is used to calculate how much potential income you can make from investing a particular asset, factoring in compound interest as well. In traditional financial markets, the APY is used to calculate the interest that you would earn on a savings account.
It differs from an APR in that while an APR acts more as a flexible predictive instrument, an APY is a more accurate measure of the interest earned on a cryptocurrency investment over a full year. However, APR calculations are useful in that they allow the investor to calculate and compare the rate of investment of various investments, so they can attempt to make the best investment choice at a particular point in time.
Typically, the higher the APR when you lend, the higher the interest rate percentage the borrower may need to repay you in interest. The higher the APY rate, the greater the interest you will receive over a 12-month period when you invest.