APR or Annual Percentage Rate is the monetary value that investors earn when they make their token accessible for loans. The APR will also include the interest rates and other fees that the loaner must pay back.
How does cryptocurrency trading occur?
Cryptocurrencies are most commonly traded on trading platforms such as Decode Global. Trading platforms have their own pool of cryptocurrencies within them and traders are trading amongst themselves with their own share of the cryptocurrencies they bought that are part of the pool, so there is no need to worry about any large network fees for every trade.
Why do people trade in crypto?
There are many reasons why people have decided to start trading in crypto. Some use trading platforms to invest and hold specific currencies, some do it to play with their money on the side, and some do it full-time as a means of income.
Crypto, in contrast to stock trading, happens faster, and often easier than stock trading, especially in some countries that have stricter rules when it comes to stock trading. It’s mostly about preference or about how much knowledge and confidence one has when it comes to what they’re trading.
How to calculate and utilize APR in crypto
If you want to learn how to calculate and utilize APR to your advantage, then you can try these two simple steps:
Step 1
Know your initial capital and the calculated profit you will get. This will come from crypto staking or farming. If a yield farming offers an APR of 100% then it is expected that your profit will double by the end of the year. If you have already determined the value of your APR then you can proceed to the next step.
Step 2
Calculate using this formula:
Annual Percentage Rate = r x N
Where:
r: The interest rate of the year;
N: Interest period (N = 1, means 1 year)
Or you can use this simple interest formula:
Source: Medium
What is the difference between APR and APY in crypto?
Hearing the term APR and APY can be confusing for those who are new to learning about decentralized finance, but there is a simple and significant difference between the two. APY or Annual Percentage Yield is the system that incorporates interest in daily, weekly, monthly, or quarterly. APR simply does not do that since it only calculates the interest yearly excluding the compounding interest.
Should people in crypto trading use APR or APY?
Whether one should use APR or APY in crypto trading will entirely depend if you are an investor or a borrower. If you are an investor or saver, it is ideal for you to use APY since the compound interest makes your investment grow and the borrowing costs higher.
If you are a borrower in the crypto world, you will most likely go for APR since the investment growth and borrowing costs will be much lower if it is calculated annually without compounding interest.
2 reasons why people calculate APR in crypto trading
Here are the most common reasons why people prefer calculating the APR when it comes to crypto trading:
The APR does not calculate the additional costs
People who would like to check the data and make comparisons in crypto trading prefer calculating the Annual Percentage Rate since it does not include the additional costs. This makes the data comparison more raw and precise for the traders.
Knowing what to expect
If you are a borrower and want to know whether you are losing out on your borrowed money or if you are able to use it to profit, knowing the APR would be a big help. If you know that you are able to trade a certain amount that exceeds your APR borrowing costs, then you know you are making a profit on the deal.
Facts To Consider When Dealing with APR and Interest
If you come across an APR deal in the crypto trading world, here are some things that you need to keep in mind:
APR should be disclosed before signing any agreement
Transparency is the key when it comes to dealing crypto trades in APR. Since APR provides much leeway for the investor to add fees, make sure that everything is transparent to both parties and the financial instruments used to calculate them.
APR does not reflect the actual costs of borrowing
Keep in mind that the APR calculation does not include the compound interest and other fees added by the investor. In contrast to APY, the loan’s APR will be lower and most crypto investors will convince the borrowers that they have low charge rates. However, you should be wary and demand for disclosure in contracts and ads.
FAQs:
What is the difference between APR and APY in simpler terms?
The only thing you need to remember when trying to differentiate APR and APY is that the latter takes into account the compound interest while the Annual Percentage Rate does not. If you’re still unsure about what is an APR, you can simply think of it as a more static and simple metric for calculating profits and interest.
What is 10% APR in crypto?
If the APR on your loaned currency is 10% and you borrowed $1000, then every interest period, your accrued interest would be $100 on your $1000 outstanding loan.
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