With yields on even the best high-yield savings accounts typically well below 1%, it’s no surprise that many people are turning to alternatives to try and put their assets to work on their behalf.
One of the things you might see as you look into cryptocurrencies is that it’s possible to earn "16,000% APY" if you’re willing to stake a token or similar eye-poppingly-high APY crypto deals.
Even when you can get 4% to 6% when you stake coins, it still looks better than keeping it in a more traditional savings account. But can you really get such a high yield on crypto?
Well, it depends. Let’s take a look at some of the ways investors are using cryptocurrencies to earn a little — or a lot — more on their assets.
What Is APY?
Annual percentage yield, or APY, represents the annualized return associated with an investment in an asset. In general, APY includes compounding interest, which is interest earned on the interest earned by the principal.
The formula for figuring out your annual percentage yield is APY = (1 + r/n)n - 1.
- r = APR of the asset (listed APR)
- n = number of compounding periods in the year
When determining APY, part of the formula depends on how often the interest is compounded. With compounding, your earned interest is added to your balance and you earn interest on that interest.
For example, many cryptos compound on a weekly basis. If you put $10,000 into a cryptocurrency offering an APR of 4.63%, compounding each week, you would end up with:
APY = (1 + 0.0463/52)^52 = 1.0474
Next, multiply that number by how much you put in to get your final balance at the end of the year, so $10,000 x 1.047 = $10,474. So, you’ve earned $474 in interest.
The more often the investment compounds, the more you earn in a year. For example, that same $10,000, if compounded quarterly instead of weekly, ends up offering $471 in interest. It’s only a little bit less for a year's span; but over time, it can make a big difference.
How To Earn APY Using Crypto
While there several ways to earn returns through crypto, staking, crypto lending, and yield farming are three of the most popular activities that are likely to result in what appears to be a high APY crypto deal. Here's how each method works.
One of the most popular ways to earn APY using crypto is through a process called staking. Basically, you buy into a token and you receive rewards for holding onto it. Staking works especially well with proof-of-stake networks, where stakeholders verify the transactions on the network. You commit your coins to the network, and you’re chosen as a validator based on how many tokens you have committed.
When you stake, you’re taking your crypto out of circulation. You can earn rewards just for having it there, and you can potentially earn even more if your stake allows you to be chosen as a validator. Staking can seem like you’re seeing a huge APY because, depending on the network, you could end up getting a big return — in the token you’re using.
There are a number of projects that promise huge returns. One is Kronos DAO, which aims to build out a decentralized finance (DeFi) structure. If you get in now and stake, you could see an APY of 20,000,000%. But that includes the number of coins you get from the project. So you’ll get a bunch of tokens, but whether they’ll be worth much of anything is another question.
How To Calculate Your Staking Returns
Some tokens offer daily rewards when you stake. So let’s say you decide to stake a token that offers daily rewards and do so at 9.7% APY. If you have 10,000 tokens, you’d figure out your daily reward by using the formula:
Daily yield = number of tokens staked x (APY/365)
So you could say, daily yield = 10,000 x (0.097/365) = 2.66
For that day, 2.66 tokens would be added to your wallet, and the next day, your new token amount would be based on your new coin total. As you can see, it can quickly start to add up. And if the cryptocurrency actually increases in value, then you could see a much higher return.
Direct vs. Indirect Staking Methods
You can stake crypto by using an exchange, or by going directly to the blockchain.
If you stake crypto through a centralized exchange like Coinbase, you’ll get a lower APY. That's because Coinbase is actually the one doing the staking and earning the rewards. It then re-distributes those rewards to its users after taking its cut.
By connecting a wallet directly to a project, you can buy coins from an approved exchange (usually decentralized) and then stake them. You’re more likely to earn bigger APYs when you stake directly with a blockchain.
Another option is to lend your crypto to others. When you lend your crypto, the borrower pays you interest and eventually returns the principal. So, you could potentially see big returns by letting others use your crypto to meet their own goals.
Some lending platforms are decentralized and make use of smart contracts to execute agreements. There are also reputable centralized platforms like BlockFi and Celsius that facilitate these transactions inside "crypto savings accounts."
Finally, with yield farming, you use your crypto to generate more crypto by contributing to a liquidity pool. For example, you can look into decentralized exchanges like Uniswap and then agree to let your tokens be used to provide liquidity for the exchange.
Your APY comes from your share of fees charged by the exchange to complete transactions, as well as any potential yield that’s offered by the exchange. Some successful yield farmers shift around between marketplaces and exchanges looking for the best returns for their crypto.
How Do High APY Crypto Deals Really Work?
When you start seeing bigger yields in crypto, there are a few things that play into it, including what you receive for various actions.
When trying to figure out what kind of crypto APY you can get, understand that the numbers can appear inflated because of how your tokens are awarded. Here are three important things to remember.
Returns And Rewards Are Paid In Crypto
When you see an APY of 9% or 500% or 16,000%, remember that you receive your interest in tokens, not in fiat currency.
Let’s say you’ve got 16,000% on a token and you stake 10,000 of that token. If your returns are compounded daily, you might get 4,383.56 tokens.
Ok, cool. But if that token is worth $0.0007, then you’ve received $3.07 worth of the cryptocurrency. That’s nothing to sneeze at — and probably more than you’d get from a savings account — but it doesn’t necessarily translate to vast riches.
Projects Can Issue As Many Tokens As They Want
Any project, DAO, or blockchain can offer high APY crypto deals because they know that the supply of tokens they can release is unlimited.
It's true that some projects are capped or deflationary in nature. But they can still issue tokens based on the protocol, whatever that happens to be. So, even in those cases, it’s possible for them to issue a large number of coins to those who become involved early.
Fees You Receive Can Boost Your Returns
Your overall APY can also be influenced by fees that are paid to you when you lend your crypto or if you use yield farming. If there are more transactions in a liquidity pool and you receive your share of the fees, this can result in a a much higher overall APY than you would have earned in interest alone.
Watch Out For High APY Crypto Scams
Don’t forget to watch out for scams. In some cases, little-known projects can promise sky-high APY crypto deals that quickly draw attention and buy-in. This has the effect of increasing demand and pumping up the price as people buy the coins and then attempt to stake them.
Then the scammers can sell their tokens while the price is high and disappear. After that, the value of the cryptocurrency crashes and you’re stuck with tokens that are pretty much worthless.
Even projects that aren't technically scams can drop hard and fast for various reasons. Wonderland is a great example. Over the past week, its price has fallen by approximately 50%.
Wonderland's nosedive was mostly caused by the revelation that Michael Patryn, co-founder of the failed QuadrigaCX exchange, was connected to the project.
The Bottom Line
Crypto deals often advertise much higher interest rates than traditional savings accounts. But even with a high APY crypto deal, you might still not receive huge amounts of passive income, unless you put in a lot to begin with.
Realize, too, that all of your returns will be in the form of cryptocurrency. So if the value of the crypto falls dramatically, you could still lose money, even if you’ve been earning a high APY.
Miranda Marquit, MBA, has been covering personal finance, investing and business topics for more than 15 years, and covering crypto topics for more than 10 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. She is an avid podcaster, co-hosting the podcast at Money Talks News. Miranda lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.