Depositing your digital assets with a crypto savings account provider enables you to earn more interest on your crypto currencies. The provider loans, invests, or stakes your assets, and then gives you a part of the gains as interest.
Two very important terms used to describe these interest rates are APR and APY. It is very important to know what they are because it will enable you to compare the account statements and generate the highest returns.
The simple annual interest rate paid on an account is called the APR, or annual percentage rate. Compounding is not considered in APR, where the interest is reinvested to earn more over a period of time.
APY stands for annual percentage yield, which is the effective return rate of an account annually due to compounding. With a high frequency of compounding periods, the APY will exceed the APR.
For instance, a $1000 crypto savings at 10% APR would deliver $100 worth of interest on the original principal sum in one year. The same deposit made in an account with a 10% APY and monthly compound interest will earn $110.52 over this period of time.
The APY rather than the APR should always be taken into consideration when choosing a crypto savings account; it represents the indication of a true annual return much more precisely. And the volatility, taxes, and inflation costs again may be another issue that is worth mentioning. The best way to guarantee that you use a credible supplier is by conducting extensive, substantive work on your crypto assets for better returns.
To calculate the annual percentage yield (APY) of a crypto savings account, you need the interest rate and compounding frequency. The compounding frequency determines how often interest is added to your balance—for example, daily, weekly, monthly, or yearly.
The APY formula is:
APY = (1 + r/n)^n – 1
r is the interest rate as a decimal (10% is 0.1).
n is the number of compounding periods per year.
For instance, with a $1,000 deposit earning 10% interest compounded daily, the APY is:
APY = (1 + 0.1/365)^365 – 1
APY = 1.1052 – 1
APY = 0.1052
So after one year, the initial $1,000 deposit would grow to $1,105.20, a 10.52% increase.
APR stands for annual percentage rate and represents the total cost of a loan or deposit, including interest and fees, expressed as an annual percentage of the loan amount. To calculate the APR, take the total interest and fees for the year, divide by the loan amount, and multiply by 100. For example, if you borrow $10,000 at 5% interest and pay $500 in fees, the APR is calculated as follows:
(Interest + Fees) / Loan Amount x 100
($10,000 x 0.05 + $500) / $10,000 x 100 = 5.5%
So an APR of 5.5% means you pay 5.5% of the loan amount annually in interest and fees.
Other factors to consider
The APY and APR are very important considerations when selecting a crypto savings account; however, they should not be the only deciding factors. Your returns and risks also depend on volatility, taxes, inflation, and opportunity costs.
In a short time interval, crypto prices can change greatly, influencing the values of assets and interest earned. In some areas, your earnings may be taxed in many ways, so speak with a tax expert to determine the many rules and procedures to follow through.
While crypto accounts might provide higher interest rates than regular bank savings accounts, they may, in turn, not match inflation. Use the real interest rate as a measure of purchasing power, defined as the nominal minus inflation. However, if the cryptocurrency is locked up in a wallet, the opportunities for other activities such as trading crypto coins, staking coin balances, or lending out any amount saved could be missed.
Choosing a reliable crypto savings account provider
Now that you have a general idea of what APY and APR are, the next thing that comes up is how to choose a reliable crypto accounts provider. With the risks attached to depositing your coins, selecting a crypto savings account provider takes some serious work.
Nevertheless, not all providers have the necessary safety measures and insurance processes in place to ensure your investment is safe. When comparing providers, there are many various aspects that should be taken into consideration, with some of the key ones being encryption methods as well as cold storage systems, audits, and insurance policies.
You should also search for competitive interest rates, flexible deposit terms, and accepted coins, as well as the option of fee transparency with good customer representation. A trusted provider with high security, competitive rates, and good customer support will be ideal for crypto savings. However, remember that cryptocurrency is very volatile, so invest as much money in it as you are willing to lose.
When selecting a crypto savings account, it is more important to look at APY rather than APR, as the former accurately portrays how compound interest works. Still, the APY and APR are not guaranteed to result in any profits.
Also focus on the volatility, taxes, and inflation rates of available crypto coins with respect to opportunity costs and the provider’s reputation, along with security, while determining the interest rates.
Consider all the factors involved, and you might end up with the benefits of crypto savings accounts.