What to expect with return On investment in cryptocurrency
What Is ROI?
To understand
what to expect with ROI in cryptocurrency, it’s important to first understand
what Return on Investment (ROI) is.
ROI is a
financial measure (ratio or percentage value) used to assess the efficiency and
profitability of an investment in an asset. Put simply, it is an indicator of
your investment’s growth in value over a certain period. It’s one of the key
financial measures used to compare different types of investments or multiple
trading operations, across traditional markets and in the crypto world.
Since ROI
measures the efficiency and profitability, it makes sense that a high ROI value
indicates that the investment is good, while a negative ROI means the return
would be lower than the costs.
How Do You
Calculate ROI?
The calculation
of ROI is based on the following equation:
ROI = (FVI – IVI)
/ IVI * 100%
where:
FVI = final value
of investment
IVI = initial
value of investment
Taking an
example, say you invest £1,000 in a cryptocurrency such and Bitcoin or Floki. £1,000 is your initial investment (IVI). One
year on, your cryptocurrency has increased in value by 25% and you sell your
investment for £1,250. This final figure is your FVI. Your ROI is calculated
like so:
(1,250 – 1,000) /
1,000 * 100% = 0.25 = 25%
This basic ROI
calculation assumes there are no additional costs such as transaction fees and
expenses associated with the investment. This basic calculation is a very quick
and efficient way to assess the ROI for an asset like a cryptocurrency.
However, a couple
of flaws with a basic calculation include this inability to consider expenses,
and time. It would be unrealistic to assume no costs in any investment you
make. You are likely to incur paid transaction fees, and these can quickly
erode base ROI calculations. Therefore, to calculate your ROI considering all
these additional expenses, use the formula below:
ROI = (FVI –
Expenses – IVI) / IVI * 100%
Another point to
consider is that when using the ROI formula to compare two different trade
opportunities, the equation does not take into consideration time. Therefore,
in some situations, one investment may seem more profitable that the other,
when in fact it’s lower because it requires more time to achieve. For example,
say your first trade had a 90% ROI but took 12 months, it would be less
efficient than a trade that is 70% ROI in 6 months.
What to
expect with ROI in Cryptocurrency?
Bitcoin and
Ethereum are the two largest cryptocurrencies now. The ROI for Bitcoin in the
last 5 years was 8770%. This means is you invested £1000 five years ago, you’d
now have made £87,700. The ROI on Ethereum over the last five years was 29613%
which means you would have made £29,613,000 on a £1000 investment. However, it
is important to remember that the value of cryptocurrency is constantly up and
down at the same time.
Estimating
long-term ROIs for many cryptocurrencies is very difficult because the market
is changing all the time. The current market is very different from what it
would have been five years ago, plus there are new cryptocurrencies appearing
all the time.