How do you control your crypto investments? We tried to explain how you can calculate your profits and losses from crypto coins.
The size of the cryptocurrency market is currently worth around $2 trillion and is quite volatile due to the ever-proliferating cryptocurrencies and people’s acceptance of crypto assets.
While holding more crypto assets means thinking about getting more returns, you need a more detailed look at how to manage and calculate your profits and losses on 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 money markets are a new market to try. Most crypto exchanges and brokers may not be able to give profits and losses exactly as investors would like in traditional markets. However, we are seeing the emergence of third-party services that provide cryptocurrency trading bots and portfolio trackers that serve to calculate the % increase or decrease in investments. Most of these services calculate your profits and losses in cryptocurrencies using the Cost Based Method.
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 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 commonly used fiat currencies.
Let’s take the USD as an example. In 2020, if 1 Bitcoin is worth $30,000 and you bought $10,000 worth of Bitcoin, you will 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 will also increase by 100% and therefore be worth $20,000. This translates to 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 many shortcomings. For example, many cryptocurrency exchanges still do not support fiat currencies; Therefore, we cannot use them as base currency on exchanges.
2. According to Bitcoin Price
Most investors calculate their portfolio earnings using Bitcoin. In most cases, traders will buy BTC using fiat currency before converting it to other altcoins.
You can easily do this calculation from the converter on our website, which offers a cryptocurrency converter. Simply enter the amount of your BTC or other altcoins. You can see the corresponding fiat or cryptocurrencies at the end of the converter.
This cost-based method calculates the opportunity cost of holding and not holding BTC to buy other cryptocurrencies. The opportunity cost is the value of the option you didn’t select.
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
worth $0.50 each. If the value of DOGE doubles to $1, but if 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 a chance to earn an extra $50,000 if you 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.
If you do a lot of trading, manual cost calculations may not be easy. A common pattern in such calculations involves calculating the average cost of each cryptocurrency before calculating the actual gain or loss of each currency in fiat currency.
Other cost-based calculations use First In, First Out (FIFO) and Last In, First Out (LIFO) methods to calculate multiple crypto transactions for traders. With FIFO, vehicles calculate the cost base, starting with the first coin you buy. In LIFO, first, your most recent coin transaction is calculated.
Manually calculating your crypto earnings can be difficult. Fortunately, today, you can quickly calculate the gains or losses of your cryptocurrency investments through cryptocurrency tracking tools such as Coin Market Manager, Delta, Lunch Money, and CoinStats.