TAE vs APY: Which one to choose for your crypto investments?

When you start investing in cryptocurrencies or saving on DeFi platforms, two confusing numbers always appear: APR (Annual Percentage Rate) and APY (Annual Percentage Yield). They look similar, but they are completely different. Understanding the difference can save you money or help you earn more. Let's untangle it.

TAE: The number that hides the reality

The APR is the simplest way to show an interest rate. It tells you: “if you invest $1,000 at an APR of 10%, you will earn $100 in a year.” Period. No complications.

Problem: does not account for compound interest. That is, it ignores that your money earns interest, and that interest also earns interest. The APR only calculates interest on the initial capital, as if the interest never existed.

Where TAE appears:

• Credit cards
• Personal loans
• Mortgages

APY: The number that reflects the real reality

The APY does account for compound interest. If your money generates interest every day, every week, or every month, that interest also starts to generate its own interest.

Example of truth:

• APR: 10% on $1,000 = $100 per year
• APY: 10% with daily compounding = $105.13 per year ( or more, depending on how many times it compounds )

The more frequent the capitalization, the greater the difference between TAE and APY.

Where do you see APY:

• Bank savings accounts
• Staking in DeFi
• Yield farming platforms
• Investment funds

In crypto: always pay attention to APY

When you see a staking platform promising “15% annual return”, ask yourself: is it APR or APY? If they only state a number without specifying, it is usually APR (the lower number). The actual APY could be 20% or 25% higher depending on how the interest is compounded.

The golden rule: The APY is always equal to or greater than the APR. If you see otherwise, something smells bad.