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%
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.