Trading and investing in cryptocurrencies, proper analysis and making smart decisions can be difficult at times. It is imperative to understand how your current investment is performing before making any further decisions regarding investing. Return on Investment (ROI) is a great tool to get started with.
What is Return on Investment (ROI)?
Return on investment is one of the criteria for evaluating an asset’s performance in the market. Since the market is about buying when the price is low and selling during the price increase, ROI tells us whether a market strategy is working or not. If the return on investment of a project is not good enough, it indicates that the investment strategy needs to be changed.
Although ROI doesn’t take into account as many factors as other market analysis tools, it does clarify how your asset is performing relative to its past performances. For example, technical analysis of an asset will explore how it withstands different market changes over a period of time. On the other hand, return on investment only pays attention to the tangible profit that the asset generates over time.
Of course, you can’t use ROI as the only guide for planning all your investment strategies. Throughout the period, you need to consider aspects such as market risk and volatility. However, if you want to know if the asset is performing well, you can rely on its return on investment. The best part is that you can use ROI to analyze the performance of traditional assets and crypto-assets.
How is the return on investment of an investment calculated?
The formula for calculating ROI should not scare you in any way. Anyone with a very simple and basic understanding of mathematics can do it.
Let A = The current value of the investment.
Let B = The original cost of the investment.
Then we can say Return on Investment = (A-B)/B.
ROI is equal to (Current value – Original cost)/Original cost.
Let’s take a more real-life-friendly example to understand what ROI means.
Let’s say you bought a property for $100,000. After a while, when you thought it was the right time, you sold the property for $150,000.
But you may have spent a little extra money to keep the real estate property in the right shape. Let’s say you pay about $20,000 for regular maintenance and repairs of the property. The point is that you need to deduct this amount from the current value of the asset. So, the calculation will be as follows:
Return on Investment = (130,000 – 100,000)/100,000
= 30000/100,000 = 0.3
You see, after taking into account the amount you spent on the asset, the current value was adjusted.
How to Calculate Return on Investment for Crypto?
In the crypto asset world, you can calculate the return on investment by deducting the original price of the crypto asset from the asset’s selling price. Next, you need to divide the result by the actual cost of the investment.
For example, if you buy a crypto for $5000 and sell it for $20000, the return on investment is 3.0. So you’ve received three times (300%) of your original investment. However, you should consider a few additional aspects, such as the associated transaction fees and the overall liquidity of the asset.
Considering that dynamic transaction fees tie crypto assets, you should also consider how much you pay for the buy/sell transaction. In other words, a simple return on investment figure does not provide a complete picture of how the crypto asset is performing. If you need such comprehensive data, you need to do more research.