In the crypto space, trading and investing can be challenging at times without proper analysis and smart decision-making. It is imperative to understand how your existing investment performs before making further investment-related decisions. Return on Investment (ROI) is a great tool to start. However, there are a few things you need to know when it comes to calculating ROI for crypto.
In this beginner’s guide, we will be explaining how to calculate your crypto ROI along with a discussion on why calculating ROI matters. But before we delve on crypto ROI, let us first know what ROI, in general, really means.
What Is Return on Investment (ROI)?
Return on Investment, or ROI, is a financial metric, an easy-to-use tool that helps measure expected returns on a crypto investment, considering its cost. It is an essential ratio to check the efficiency of a crypto trade. As the market is all about buying things when the price is low and selling them during price gain, ROI tells us if a market strategy is working or not. If the ROI of a project isn’t good enough, it indicates the need for changing the investment strategy.
Although ROI does not consider as many factors as other market analysis tools do, it clarifies how your asset performs concerning its past performances.
For instance, say you purchased a cryptocurrency for $3000 and sold it for $15000 in the crypto market. When you calculate the ratio, it will be 5.0 (500% ROI). This ratio or percentage helps you understand that by investing $3000, you can make five times more profit.
You cannot use ROI as your only guide when planning your investment strategies. Over time, you need to consider aspects like market risk and volatility. Nevertheless, if you want to know if the asset has been performing well or not, you can count on ROI. The best part is that you can use ROI to analyze the performance of traditional assets and crypto-assets.
Positive and Negative ROI
When calculating the ROI, there are two outcomes you can expect to get: the first one is positive, and the second one is a negative ROI. The positive ROI means that your net returns exceed the investment costs. On the other hand, negative ROI means net returns are low, meaning the total costs are higher than the return.
How to calculate your crypto ROI?
The ROI formula is quite simple and looks like this:
ROI = [(Gain of Investment — Cost of Investment) / Cost of Investment] x 100%
ROI is the best way to learn the potential property value of cryptocurrencies you own. For example, if Elon Musk buys Solana at $120 USD/SOL, and the price spirals up to $400 USD/SOL, which is entirely possible given that Solana is now one of the primary currencies on OpenSea, then what’s the ROI going to be?
$400 / $120 = 3.3 × 100 = 333.3% return on investment
In the world of crypto assets, you can calculate the Return on Investment by reducing the original price of the crypto asset from the asset’s selling price. Then, you have to divide the result by the actual cost of the investment.
For example, if you buy some crypto for $5000 and sell it for $20000, the ROI would be 3.0. Meaning you received three times (300%) your original investment. However, you have to consider a few additional aspects like the transaction fees involved and the overall liquidity of the asset.
Considering that dynamic transaction fees bind crypto assets, you should also consider how much you pay for the buying/selling process. In other words, a simple ROI figure would not provide you a complete picture of how the crypto asset performed. If you need such comprehensive data, you need to do more research.
The Limitations of ROI
There are a few factors that ROI willfully ignores. From an overall market perspective, these factors may be necessary. Some of them are:
- ROI calculation does not consider time as a crucial factor. ROI, in general, does not specify the time it applies to. That is why experts and entities come with a concept called annualized ROI, which refers to the progress made within a year.
- While ROI tells us the asset’s performance, it fails to explain the asset’s environment. We cannot know about potential market risks or changes in liquidity. That is why you need more than just ROI to devise a trading strategy.
- The trader may also need additional calculations to understand the precise value of assets, especially when dealing with inflation. Since ROI calculation compares the current price and the original cost, the numbers may not precisely sync with the result.
Final Thoughts
Along with its significant advantages, ROI has some limitations as well. However, these limitations should not make you overlook how the ROI metric can improve your trading decisions. Therefore, the next time you plan on trading in the market, remember to use the ROI metric. Always combine it with another indicator to have a better probability of success, and remember to use a trading strategy that includes proper risk management.
