APR and APY are frequently confused. Both show you how much interest you'll pay or earn, are expressed as a percentage, and indicate the cost or profit over the course of a year. The APY, on the other hand, takes into account compound interest, whereas the APR does not. As a result, the APY offers a more accurate rate of interest.
Let's take a closer look at APR and APY to discover how their meanings differ.
What is APY?
APY is an abbreviation for "annual percentage yield." It is the total amount of money you earn in a savings account over a period of 12 months. It is a way to monitor the accumulation of interest over time.
The higher APY is, the faster your money grows.
The interest you earn, otherwise known as compounding interest, refers to the money received — the initial amount (an amount you’ve invested) and the generated interest. Compounding is a way to make more money over time. We can refer to it as interest from your generated interest.
Bank APY vs Bitlocus APY
The traditional savings or investment account can be replaced by Bitlocus - a gateway to DeFi protocols. Although it uses cryptocurrency investment protocols, the platform makes it simple to invest because Bitlocus will buy any cryptocurrencies for you. You just deposit the number of euros you want to invest and your money will be automatically converted into crypto.
The average bank savings interest rate is 0.06% and while there are some banks that offer higher interest rates, most of them don’t go over 1%.
If you will check Bitlocus, you'll discover a handpicked list of the best available investments with interest rates of up to 24% (according to data of October 4th, 2022).
APY vs APR
APR and APY are two financial terms that could be frequently misunderstood. Although it may appear at first glance that both terms refer to the same thing, they are entirely different.
APR is a simple interest rate, which means your profit directly depends on your original investment: If you invest 10,000 coins with an interest rate of 10%, you’ll have 11,000 after the first year, 12,000 after the second, and so on. So, as you can see, your investments will steadily grow by 10% every year.
APY includes compounding interest rates. Let’s take into example the same 10,000 coins. If your APY, or compound interest, is 10%, you’ll have 11,051 by the end of the first year, 12,213 by the second year, and so on.
What factors influence APY?
Inflation, or the decline in the value of a currency over time, is a significant factor for the APY. Inflation rates are at an all-time high when comparing traditional currencies. Additionally, although the cryptocurrency is somewhat impacted by this, its inflation rates are much lower.
Inflation still plays a significant role in investment even though cryptocurrencies generally have more predictable and lower inflation rates than your traditional currencies.
If your crypto coin has a higher inflation rate than your APY, then your earnings will deteriorate at the same rate it is accumulated.
Supply and demand
Pricing is influenced by two factors: supply and demand. Interest rates will naturally be lower if there is lots of supply or demand is very low.
And, if there is a high demand but a limited supply, interest rates (including the APY), will rise.
How does it function? To make money, you in a way lend your crypto coins, and if there is no demand, no one wants to borrow that cryptocurrency. As a result, you will produce no yield.
You will avoid such issues by using Bitlocus. The platform provides you with a variety of alternative investment possibilities from which you may choose and switch at any time. This way, you'll be able to maximize your return without having to undertake a lot of technical work.
The length of time after which the compound is calculated is referred to as the compounding period. The compounding period influences the APY rate in such a way that as the period of time increases, so does the APY rate. If the money you deposit is compounded daily, the final balance will be higher than if it is compounded monthly.
Bitlocus is a gateway to DeFi protocols with the goal of serving clients who are dissatisfied with what banks have to offer and are looking for better investment possibilities, but don't want to deal with the hassle of crypto procedures.