Interest Rates in Crypto: Earning on Your Assets

Interest Rates are fees or income, depending on time, charged in proportion to the amount of money deposited, borrowed, or lent.

What is interest rate?

Interest rates are the rates an individual or financial institution charges or earns over a period of time as a result of borrowing or investing/lending. Interest rates can accrue not only on money, but also on any other financial value, such as a car, house, or cryptocurrency.

Borrowers are charged an interest rate when they take out a loan. This interest rate is usually described in terms of the annual percentage rate (APR), which is the amount that is paid each year as interest on the total loan amount, for example, 5% APR.

Lenders and investors, on the other hand, benefit from interest rates in the form of a return on their investments – for example, the interest paid for holding cash in a savings account. Typically, the interest rate is expressed as an annual percentage yield (APY), which is the expected return earned per year on an investment in percentage terms.

In the world of cryptocurrencies, interest rates are applied in much the same way as in traditional finance, but with an added level of complexity. Due to the volatile nature of cryptocurrencies, the absolute value of interest can vary significantly over a given period, even if the APR or APY remains unchanged.

This is because the interest rate is related to the principal, i.e., the amount borrowed or deposited. As the value of the principal increases, the absolute amount of interest also increases proportionally – unless the rates are pegged to the U.S. dollar or other fiat currency at the time of the deposit/loan.