What Are Interest Rates?

Interest rates are the rates which an individual or financial institution charges or earns over a specific amount of time as a result of either borrowing or investing/lending. 

The type of assets that can incur interest rates are not limited to money, but any other financial asset with an agreed intrinsic value such as a car, a house or a cryptocurrency. 

Borrowers are charged an interest rate when they take out credit. This interest rate is usually described in terms of annual percentage rate (APR), which is the amount that is paid each year in interest relative to the total loan amount, e.g. 5% APR. 

Conversely, lenders and investors benefit from interest rates as profit on their investments — such as the interest paid for holding cash in a savings account. This is usually expressed as annual percentage yield (APY), which is the expected yield earned per year from an investment in percentage terms. 

Interest rates in the world of cryptocurrency work much the same as they do in traditional finance, but with an added layer of complexity. Due to the volatile nature of cryptocurrencies, the absolute value of interest can fluctuate considerably over a given period, even if the APR or APY stays the same. 

This is because the interest rate is related to the principal amount, i.e. the amount borrowed or deposited. If this principal increases in value, the absolute value of the interest will also increase proportionally — that is, unless rates are pegged to the US dollar or another fiat currency at the time of deposit/borrowing.