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What Is an APY in Crypto?

What Is an APY in Crypto?

Bitcoin! Get your Bitcoin here!

Cryptocurrency has certainly become popular over the years with investors. Crypto exchanges are growing quickly thanks to the high volatility and rewards of investments in the crypto space. Investors want in on the effects of compounding interest — the best-case scenario for investing in crypto assets.

With popularity comes demand. There are over 7,300 cryptocurrencies to choose from today, and you can use them for more than just a form of investment or savings account with a high interest rate.

Crypto could be the currency of the future, with crypto lending becoming more popular and many investors opting for staking or yield farming. Before you head to the market and buy it all up, let’s get an understanding of it, as well as the metrics you should look for to avoid a bad investment.

What Is Crypto?

Did you know that the first bitcoin transaction was used in the state of Florida to purchase pizza?

This payment took place in 2010 with 10,000 bitcoins exchanged, amounting to approximately $40. Fast forward to today, and that same currency would be worth well over $100 million. Talk about passive income.

So, what is crypto?

Crypto is a digital asset created using computer networking software. The term comes from cryptographic processes, such as encryption. Encryption diverts people from making copies or attempting fraud.

Being that crypto is a digital currency, there are associated risks. These include:

  • The FDIC does not insure cryptocurrency, as it does for traditional savings accounts
  • No bank regulations, resulting in default risk
  • The value of crypto changes and may even become “dead”

The History of Cryptocurrency

Even though it’s making top headlines today, cryptocurrency has been around for about 13 years — since 2009. Who created it? That remains unknown.

Back in ‘09, an anonymous user published a post titled, “Bitcoin — A Peer to Peer Electronic Cash System.” Satoshi Nakamoto was the name used, but the author’s real identity is still to be determined.

Types of Cryptocurrency

There are two general buckets that cryptocurrency falls under:

  1. Coins
  2. Tokens — not to be confused with non-fungible tokens (NFTs)

What Are Crypto Coins?

Crypto coins were built on their own blockchains with the intention that they would be used as a form of currency.

There are two primary categories of coins: Bitcoin and Altcoin.

Bitcoin is a blockchain-based cryptocurrency.

As the first three letters in the name imply, an Altcoin is an alternative form of Bitcoin.

Examples of Altcoin include:

  • Namecoin
  • Litecoin
  • Peercoin
  • Ethereum (ETH) - programmable blockchain
  • USD Coin (USDC) - built in a 1:1 ratio with the US dollar, making transactions cost-effective and seamless.
  • Tether (USDT)
  • Different varieties of Stablecoins - maintain their value with greater consistency than standard crypto

What Are Crypto Tokens?

Tokens are comparable to stock shares. In contrast to crypto coins, they cannot be exchanged as currency. Instead, they represent the value of an asset.

Using a decentralized app known as DApps, tokens are built on a blockchain that already exists. Investors can easily trade them since they are not attached to a single blockchain or act independently. Blockchains are regulated by programs called DeFi protocols, which also manage collections of cryptocurrency called liquidity pools.

Examples of tokens include:

  • Tether
  • Uniswap
  • Chainlink
  • Polygon

Cryptocurrency Miners

In the context of crypto, mining refers to the collection of data and the creation of new coins.

Instead of dressing in full gear and heading down into a mine with a pickaxe, crypto mining requires a computer and specialized software designed to solve complex mathematical equations.

Specifically, miners require:

  • A GPU (graphics processing unit)
  • An ASIC (application-specific integrated circuit)

Crypto mining attracts investors. One can almost compare it to the California Gold Rush of 1849, as miners are incentivized with tokens. A token is rewarded for every “block” of verified transactions a crypto-miner receives.

What Is an APY?

APY is an acronym for Average Percentage Yield. Does it ring a bell? It is not specific to cryptocurrencies.

Financial institutions use APY to determine an estimated profit over 12 months, assuming there is no transfer or withdrawal of the funds in the interim. Typically, this percentage is low. Cryptocurrencies carry high APY and a higher overall rate of return.

APY and Crypto

Simple interest is typically compounded monthly at most financial institutions, although some compound their simple interest rate at the end of the year. With crypto, it could compound sooner, leading to the highest yield you might see in your investing career. However, APY can fluctuate; increases and decreases are common.

APY in crypto compounds is based on the value of the crypto. That’s the difference when comparing it to a traditional savings account. The value of crypto can change, resulting in either growth or potential loss.

Don’t be surprised when you see the APY crypto carries. Traditional accounts range from .01% to .35%. Crypto accounts, depending on the type of asset, ranging from 2% to 12%.

The higher the APY, the better — that’s the best way to think of it in conjunction with cryptocurrencies.

A popular option is 7-Day crypto, wherein a certain amount of interest is compounded every seven days. There are other options also, including 14-day or 30-day crypto.

What do shorter periods do?

  • Alleviates risk associated with price swings
  • Aligns the APY with the financial institutions, verifying that it is the same
  • Allow new crypto investors to test its investment potential

APY Versus APR

A secondary metric used to measure interest is APR (Annual Percentage Yield). APR (Annual Percentage Rate) is more common on loans.

To simplify, APY focuses on earning interest over a period of time — the annual return, whereas APR on the annual interest rate that you have to pay a lender.

Why Is Crypto Popular?

Let’s take a look at all of the benefits owning cryptocurrency offers.

Fees Are Kept To a Minimum

This is the leading factor as to why crypto is on the top charts. Who wants to invest their money for it to be bombarded with fees?

No Relation to World Governments

The stock market, for example, is affected by global events. Prices of shares can quickly plummet if war is declared in a country.

Because cryptocurrencies have no relations with world governments, their value is appealing as it stays stable.

Profit? Yes, Please!

Think of crypto as you would a commodity, such as gold or silver. The goal is to purchase when it is at a competitively low price. Then, sell it for a profit once the prices surge.

Easy To Use

More and more people own crypto, opening the door of opportunity for more companies to allow crypto as an acceptable form of payment on internet transactions.

More Secure Than Traditional Payment Options

Afraid of hackers? Unfortunately, they are out there, whether it is to steal an identity or devour your wallet.

Fortunately, cybersecurity is on the side of cryptocurrency. It’s considered safer to use on online transactions than that of your credit or debit card. It all boils down to how blockchain technology works, recording “blocks” of transactions and timestamping.

Purchasing Crypto Is Not Difficult

It’s not a circus act to obtain crypto. You won’t have to jump through hoops of fire or walk the tightrope.

Step 1: Find a broker or a cryptocurrency exchange. Brokers are ready and available to get you started today, removing complexity from the equation.

Step 2: Create your account. Just like opening a savings account, money market account, retirement account, or another hallmark of traditional finance, you’ll need to provide information to verify who you are before you can buy, sell, and trade. Instead of going to a financial institution, this information goes to the blockchain.

Step 3: Initiate a deposit. You can’t invest with zero money in the account. Here you’ll be allowed to link your bank account and join the crypto movement.

Step 4: Time to invest.

Step 5: Choose how you’ll store your crypto. When it comes to storage, you have options. You can choose to:

  • Keep your crypto on the exchange
  • Use a “wallet.” Hot wallets store your currency online, whereas cold wallets are more secure, keeping it offline.

Is Crypto The Future of Money?

No one knows the answer for sure, but there has certainly been a shift in how the world is exchanging money. Digital payments and contactless payments are making their way up the charts.

Crypto is not a one-size-fits-all investment strategy. Not everyone is on board with the level of risk involved in the investment, and it may not suit investment goals.

Crypto could be the future, but only time will tell. Until then, think about the following questions before deciding to move to digital currency:

  1. Will crypto satisfy your wallet? Before buying in, assess your current financial position, both short-term and long-term.
  2. Are you a crypto expert? Ok, maybe you don’t need to know anything but make sure you’ve done enough homework to understand how crypto operates.
  3. Is this your only investment, or will it diversify your portfolio?

The Bottom Line

Move over paper money and lay down the red carpet. Make way for the latest and greatest: cryptocurrency! Digital currency is taking the spotlight both as an investment and a transactional currency.

As you explore crypto, watch its APY. It leads the market and reflects what you can be earning in your crypto savings account over time.

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Sources:

16 Surprising Facts About Cryptocurrency [That Even Some Experts Don't Know] | FinanceBuzz

A Short History Of Bitcoin And Crypto Currency Everyone Should Read | Forbes

The Basics about Cryptocurrency | OSWEGO

Seven Reasons Why Cryptocurrency Is So Popular | The World Financial Review