How to Calculate Your Return on Cryptocurrency? Using the ROI Method
Looking to asses your returns on your cryptocurrency investments? Take a closer look at the ROI method.
Whenever you invest in something, ideally you want to get a return that covers your initial capital plus a surplus that you can net. This concept of ROI (Return on Investment) holds true any type of investment, real estate, stocks, and in this case, cryptocurrencies.
It goes without saying that different asset classes will perform and yield different amounts of returns. When it comes to cryptocurrencies traders and investors measure the performance and the efficacy of a crypto asset to compare the performance of multiple crypto investments in a portfolio.
In this article, we will cover the basics of how to calculate ROI in cryptocurrency.
Note: All crypto investments carry a certain level of risk. Discussions in this article are not to be interpreted as financial advice. Always do your own research before making any investment decisions.
What is ROI?
As briefly prefaced above, Return On Investment (ROI) is a commonly used term that refers to the relationship between the amount of money invested in something and the amount of money generated by a particular asset.
As a general rule, if the number is positive it means you’re making a profit; if it’s negative, it means you’re losing money.
ROI quickly compares how your current asset holdings are performing to if they had been invested in an alternative asset. For example, technical analysts will compare the historical performances of one asset to another, while ROI only focuses on the profit of your current investment over time.
In any investment strategy, you must remember that returns on investment (ROI) isn’t always the most important guide.
Sometimes you need to take a broader approach and consider various details, such as market volatility or your risk profile. However, if you’re wondering if a particular asset in your portfolio is performing, you can count on ROI.
Further reading: Maximising the Risk to Reward.
Using ROI to calculate return on cryptocurrency
Cryptocurrencies are simply a form of digital currency. The use of cryptography is what allows it to be secure, and this makes it nearly impossible to counterfeit (or, in crypto terms, “double-spend”).
Since, it’s a digital asset, it can be traded on exchanges and converted into other currencies. It’s also possible to make returns from the fluctuation in their values. The metric that is used to measure the efficiency of an investment in cryptocurrency is return on investment (ROI).
In the world of cryptocurrency, ROI is a metric that strategic traders commonly use. It stands for “return on investment” and refers to the profit that can be derived from holding onto a certain cryptocurrency.
Read more: What is cryptocurrency?
How to calculate ROI on cryptocurrency?
To calculate ROI, you need to know the amount of money you put into a position (your investment), the amount of money you made from selling that position (your profit), and the time it took for your investment to reach its peak value and then decline again (your holding period).
The ROI formula is as follows:
ROI = [profit] / [cost of investment] * 100%
For example, if you invested $100 into Bitcoin and sold it for $200 after one month, your profit would be $100. If you then held onto those coins for another month and sold them for $300, your total profits would be $300.
Your ROI would then be calculated as follows:
ROI = [($200-$100)] / ($100) * 100%
or [$100/$100] * 100% = 100%
Note: Considering that dynamic transaction fees bind crypto assets, you should also consider how much you pay for the buying/selling process on your cost of investment.
Must read: Understanding Crypto Assets.
Is it enough to calculate investment with ROI?
As you may know, Return On Investment (ROI) is a metric that helps us measure how much profit we make from an investment. However, despite its popularity, using only ROI to measure your investment is not enough.
ROI does not tell us about potential market risks or changes in liquidity. For example, if you are trying to trade in a volatile market, you might see a high ROI in the short term but lose money overall, which would make it difficult to know whether or not your strategy is successful.
Furthermore, while ROI tells us the asset’s performance, it fails to explain the asset’s environment. For example, if there was a change in regulations that made it more difficult for companies with debt to access capital markets, then an asset with a high return on investment would still be performing poorly because its cost of capital would increase dramatically.
In other words, a simple ROI figure would not provide you a complete picture of how the crypto asset performed.
You need to do more than just ROI to devise a trading strategy because it’s possible to have an asset that performs well but has risks associated with it—and these risks may come back to bite you later on down the line!
Calculating your returns using the ROI method is quick and simple.If you consistently use this method, you have the ability to make better decisions about your investments and find out what works, versus what doesn’t.
Using ROI to analyse your investment portfolio would be an excellent exercise for seasoned cryptocurrency investors and newcomers alike.
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated December 6, 2022