How do you control your crypto investments? Here’s how you can calculate your profits and losses from crypto coins. The cryptocurrency market, currently worth around $2 trillion, is highly volatile due to the ever-growing number of cryptocurrencies and increasing acceptance of crypto assets. While holding more crypto assets may lead to higher returns, it’s essential to take a detailed look at how to manage and calculate your profits and losses from cryptocurrencies.
Why Do You Need to Calculate Profit and Loss in Bitcoin?
As with traditional financial markets, your success in cryptocurrency investment depends on how well you manage your investment portfolio. Crypto markets are a new field to explore, and most crypto exchanges and brokers may not be able to calculate profits and losses in the same way as traditional markets. However, we are seeing the emergence of third-party services that provide cryptocurrency trading bots and portfolio trackers to calculate the percentage increase or decrease in investments. Most of these services use the Cost-Based Method to calculate your profits and losses in cryptocurrencies.
This method is used as follows:
Calculation Using Cost Basis
Cost-based calculation helps you calculate the value of a cryptocurrency based on its purchase price, fees, and transaction fees. This method can be applied in two different ways when managing your cryptocurrency earnings.
1. On a Fiat Currency Basis
This method helps you calculate your crypto cost using the local fiat currency. You can base your cryptocurrency cost on TL, USD, GBP, EUR, or JPY, among other commonly used fiat currencies.
Let’s take USD as an example. In 2020, if 1 Bitcoin was worth $30,000 and you bought $10,000 worth of Bitcoin, you would receive 0.33 BTC.
You then sold 0.33 Bitcoin a year later, when the value of BTC increased by 100% to $60,000. The value of your 0.33 BTC would also increase by 100% and therefore be worth $20,000. This results in a profit of $10,000 from your investment. While it may seem simple to measure your cryptocurrency gains/losses using fiat assets, the method has several shortcomings. For example, many cryptocurrency exchanges still do not support fiat currencies; therefore, we cannot use them as base currencies on exchanges.
2. According to Bitcoin Price
Most investors calculate their portfolio earnings using Bitcoin. In most cases, traders buy BTC with fiat currency before converting it into other altcoins. This cost-based method calculates the opportunity cost of holding BTC versus using it to buy other cryptocurrencies. The opportunity cost is the value of the option you didn’t choose.
You can easily make this calculation using the converter on our website, which offers a cryptocurrency converter. Simply enter the amount of your BTC or other altcoins, and you will see the corresponding fiat or cryptocurrency values at the end of the converter.
Let’s say you buy 1 BTC for $50,000 and decide to use Bitcoin as your base currency (BTC/DOGE pair) to buy 100,000 DOGE.
Let’s say Dogecoin (DOGE) is worth $0.50 each. If the value of DOGE doubles to $1, but the value of BTC triples to $150,000, the opportunity cost will be $50,000. This is the difference between the new value of BTC ($150,000) and the value of your 100,000 Dogecoins, which are currently worth $100,000. While you can still make $50,000 in DOGE, you would have had the chance to earn an extra $50,000 if you had kept your BTC.
The only problem with using BTC as the base currency, i.e. parity, is the constant exchange rate fluctuations in cryptocurrency pairs.
Cost-Based Tools
If you do a lot of trading, manual cost calculations may not be easy. A common approach in such calculations involves calculating the average cost of each cryptocurrency before determining the actual gain or loss of each currency in fiat currency.
Other cost-based methods use First In, First Out (FIFO) and Last In, First Out (LIFO) to calculate multiple crypto transactions for traders. With FIFO, the cost base is calculated starting with the first coin you bought. In LIFO, the most recent coin transaction is calculated first.
Result
Manually calculating your crypto earnings can be difficult. Fortunately, today, you can easily calculate the gains or losses of your cryptocurrency investments using cryptocurrency tracking tools such as Coin Market Manager, Delta, Lunch Money, and CoinStats.
