ROI (return on investment) is a performance metric used in cryptocurrency trading to inform you about the profitability of your investment, as well as how the investment performs in comparison to the initial expense. Any high return on investment (ROI) signifies that the activity is profitable, while a low ROI indicates that profit is being compromised. ROI is a must-know term in cryptocurrency trading since it is a simple global measure of profitability.
How to Calculate ROI
ROI, or return on investment, is a ratio or percentage figure that shows the profitability or efficiency of a certain transaction or investment. You can derive a clear figure (Ex: 0.50) or percentage (Ex: 50 %) using it. Therefore, ROI can be conducted to evaluate different investment kinds and trading activities.
The return on investment (ROI) is calculated as a percentage of the purchase price. Calculating ROI is as easy as dividing the return (net profit) by the total acquisition costs (net cost).
- (Current Value ー Total Cost) / Total Cost = ROI
- Net Profit / Net Cost = ROI is another way to write it.
- You can also do it with an ROI calculator or a crypto investment calculator.
Suppose you paid USD 1,000 for 1,000 XRP (Ripple), with each XRP costing $1 a year ago. If the current price of XRP is $1.80, you would have an ROI of 0.80 or 80%.
Keep in mind that ROI does not account for time. This implies that in certain cases, one investment may appear to be more profitable than another but, in reality, its efficiency was lower since it took a significantly longer length of time. If your first sale yielded a 65% ROI but took a year to execute, it would be less efficient than a second one yielding a 50% ROI in six months.
Why ROI Is Not Enough
A few elements are blatantly ignored by ROI. These variables may be necessary from a market standpoint. Among them are:
- Time is not taken into account in the ROI calculation. ROI, in general, does not specify the period to which it applies. As a result, experts and entities developed the notion of annualized ROI, which refers to improvements accomplished during a year.
- While ROI informs us about the asset's performance, it does not describe the asset's context or environment. We don't have access to information concerning prospective market risks or changes in liquidity. That is why developing a trading strategy requires more than simply ROI.
- Additional computations may be required by the trader to comprehend the precise worth of assets, especially when dealing with inflation. Because the ROI calculation compares the current price to the initial cost, the numbers may not exactly match the outcome.
Despite these flaws, ROI may be used as one of the first stages in determining if the item in issue is worth your time and effort. However, in the case of crypto assets, you must pay closer attention to a few additional factors such as liquidity and volatility because although the return on investment is crucial, it should not be the only factor to consider. Using ROI alone to track the performance of your investment will provide you with incomplete data.
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