The Fed is raising interest rates, which will be a boon or burden to several aspects of your finances.
Many people with traditional savings accounts — with interest rates hovering around an average of 0.6% — will watch their accounts to see how this rate hike will impact their savings (for better or worse).
Alternatively, crypto savings accounts have sprouted up all over the market and are becoming more interesting due to their attractive annual percentage yield (APY). In fact, It’s one thing to buy cryptocurrency and stablecoins, but it’s another to earn passive income from them.
If you’re still scratching your head about how APY in crypto works, our guide will explain what you can expect.
What is APY?
Assets appreciate through compound interest — earning interest on interest. This “annual percentage yield” (APY) is a key metric to help you compare returns between wealth platforms and individual assets.
APY is the annualized rate of return from an investment, factoring in compound interest that accrues or grows with the balance. Compound interest includes interest earned from the initial deposit plus the interest earned on that interest.
Different Kinds of Interest: Simple Interest vs Compound Interest
The two interest rate models commonly used are simple and compound interest. We’ll break down how they work.
Simple interest is calculated by multiplying the asset value (called the principal) by the interest rate, or principal * ( time * interest ).
With $10,000 in banked assets held for one year at an interest rate of 5%, we get:
- 10,000 * ( 1 * 0.05 ) = 500
- $500 interest income will be earned for a total value of $10,500 at the year’s end
- Over 10 years of simple interest, we calculate 10,000 x ( 10 x 0.05 ) = 5,000
- $5,000 interest income will be earned for $15,000 at the decade’s end
Earning interest on your interest, and growing your money faster, is the primary feature of compound interest.
One new term to look for is the “compounding period,” how frequently your interest will compound. The formula for calculating compound interest is the following:
- Principal “ ((1 + (rate/periods)) ^ (periods * time)) =”; “rate” is the interest rate, “periods” is the number of times the interest is compounded per time period, and “time” is the number of time periods.
The simple interest example described above is calculated using this formula by setting the compound interest period to once per year (1) and the time to one one, or 10,000 * ((1 + (0.05 / 1)) ^ (1 * 1)) = $10,500.
The result — $10,500 — is the same as our first example.
The power of compounding interest is seen when the compounding period is monthly (12), weekly (52), or daily (365). Instead of $10,500, the ending values increase the more frequently the compounding.
- 10,000 * ((1 + (0.05 / 12)) ^ (12 * 1)) = $10511.62
- 10,000 * ((1 + (0.05 / 52)) ^ (52 * 1)) = $10512.46
- 10,000 * ((1 + (0.05 / 365)) ^ (365 * 1)) = $10512.67
How Does APY Work in Crypto?
The seven-day APY is an annualized yield using seven-day returns. It’s calculated by taking the net difference in price from seven days ago and today and generating an annual percentage.
The formula to calculate seven-day APY is as follows: APY = (end − beginning − weekly_fees) ÷ beginning × 365/7.
Where “end” is the price at the end of the seven-day period, “beginning” is the price at the start of the seven-day period, and “weekly_fees” is any fees for the week.
This calculated amount helps investors to understand the weekly yield or return.
Interested in learning more about the on-ramps to crypto, check our guide!
Annual Percentage Yield
The takeaway from these calculations are:
- Compound interest returns more profit than simple interest
- The more frequently the interest is compounded, the greater the profit
The APY of an asset is the amount of interest, shown as a percentage, earned over a year. (APY is the opposite of the “annual percentage rate” (APR), the amount of interest you’ll be charged to borrow money.) The APY takes into account not only interest but also the rate at which it compounds.
Put Interest Compounding To Work With Abra Earn
Abra Earn puts the power of interest compounding into your arsenal!
Interest payments are distributed every Monday. Interest will be paid out primarily in the same asset you have in the Abra Earn account, and you can expect to get some additional bonus paid in CPRX (depending on your loyalty tier).
The current interest rates are:
- Bitcoin (BTC) – $1.15% to 7.15%
- Bitcoin Cash (BCH) – $1% to 7%
- Cardano (ADA) – $1% to 8%
- Crypto Perx (CPRX) – $1%
- Ethereum (ETH) – $1.65% to 7.65%
- Litecoin (LTC) – $1.25% to 8.25%
- Paxos (USDP) – $1% to 13%
- Stellar Lumens (XLM) – $1% to 9%
- Tether (USDT) – $1% to 13%
- TrueUSD (TUSD) – $1% to 13%
- USD Coin (USDC) – $1% to 13%
Check our updated interest rates.
Watch our video series: introductions to cryptocurrencies, Money Talks, and more!
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