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Return on Investment in Cryptocurrency

Return on Investment in Cryptocurrency: Formula and Calculations

Investing in cryptocurrencies is attractive. Every day, people worldwide invest in the cryptocurrency market with great expectations for large returns on their investments.

However, the attractiveness of investing in cryptocurrency generally fades quickly due to a lack of awareness regarding key variables and poor research. Unfortunately, because of their complex and unpredictable nature, some investors experience huge losses.

To avoid making poor judgments, you must understand one of the most important measures for evaluating possible risks - Return on Investment (ROI).

To get a jump start in crypto trading, you need to understand the ROI crypto statistic.

What is Return on Investment (ROI)?

ROI is a standard indicator used by strategic traders in the cryptocurrency industry.

Return on Investment (ROI) is a financial term, an easy-to-use tool that helps estimate the potential expected returns on cryptocurrency investment, considering the cost. 

It is a ratio used to assess the effectiveness of a cryptocurrency deal.

For example, suppose you bought a cryptocurrency for $1000 and sold it for $5000. The ratio will be roughly 5.0 or 500% when calculated. This ratio or percentage explains how you may generate five times the return on a $1000 investment.

The ROI ratio will most likely be negative or positive.

Positive ROI: Your crypto investment will be helpful and rewarding if your ROI is favorable.

Negative ROI: A negative ROI indicates that the transaction will not be lucrative, and you may incur a loss.

Why does ROI matter?

The ROI number is essential to you as an investment. The statistic helps cryptocurrency traders assess how successful investment may be. 

It precisely monitors the effectiveness of cryptocurrency investment. It provides information on how this investment performs compared to the first ones.

The ROI statistic may potentially assist in evaluating different trading activities. Before investing in cryptocurrencies, most traders examine the ROI statistic.

Overall, it is an excellent sign of your crypto assets' higher market returns. As a result, before trading cryptocurrency, make sure you calculate this critical metric.

ROI calculation

The method is fundamental for determining Return on Investment (ROI). Anybody with a basic understanding of pricing history can calculate ROI.

It consists of two core values:

  1. The trade's initial value
  2. The trade's current (present) value

The following is the formula:

Return on investment = (Present Value of Investment - Initial Value of Investment) / Initial Value of Investment (ROI)

Let's put this formula in a real-life situation.

  • Suppose you have bought Bitcoin worth $1000
  • After a few weeks, your initial investment of $1000 turns into $1400

Now to calculate ROI, we'll put the values in the formula.

ROI = [1400 (Present Investment Value) - 1000 (Initial Investment Value)] / 1000 (Initial Investment Value)

ROI = 400/1000 = 0.4

After calculating the ROI, multiply it by 100 to get the Rate of Return on your cryptocurrency investment.

ROI, in this case, would be 0.4 x 100 = 40%

You can alternatively define ROI as the ratio of net profit to net costs of trade.

ROI Constraints

  • ROI Ignores Time

To determine how well your cryptocurrency investment performs, you must examine its time frame. Time will reveal more about the effectiveness of your bitcoin investment.

  • ROI Causes Confusion in Trade Valuation

In reality, several crypto traders are still unsure how to value their crypto coins. They are frequently perplexed when assigning the correct value to the coins. 

As a result, ROI should have included the valuation element in the statistic to facilitate comprehension of profitability.

  • ROI Doesn't Tell You Anything About Asset Environment

Your ROI calculation tells you about the performance of your transaction. Nonetheless, the digital economy is fraught with dangers and flaws. 

As a result, relying just on ROI to develop a trading strategy will be ineffective.


Final Words

ROI offers considerable advantages, but it also has certain drawbacks. These constraints, however, should not cause you to disregard the critical metric. 

As a result, the next time you develop a trading plan, calculate the ROI of the investment beforehand.

LordToken | Jun 6, 2022