Cryptocurrency investments are enticing. People from all around the globe are investing more in the crypto market with every passing day. People have high hopes of reaping massive returns from their investments in the market.
However, often due to a lack of understanding of a few crucial metrics and improper analysis, the allure of investing in crypto fades away in no time. Unfortunately, some people suffer huge losses due to their complex and highly-volatile nature.
To save yourself from making the wrong decisions, you need to grasp one of the most crucial metrics that measure potential risks – Return on Investment (ROI).
For a head start in crypto trading, you need to have a grasp of the ROI crypto metric.
What is Return on Investment (ROI)?
In the world of cryptocurrency, ROI is a metric that strategic traders commonly use.
Return on Investment or ROI is a financial metric, an easy-to-use tool that helps measure the possible expected returns on a crypto investment, considering its cost. It is a ratio to check the efficiency of a crypto trade.
For instance, you purchased a cryptocurrency for $3000 and sold it for $15000 in the crypto market. When you calculate the ratio, it will be 5.0 approximately or 500%. This ratio or percentage helps you understand that on investing $3000, you can make five times more profit.
You are likely to get an ROI ratio in negative or positive numbers:
The crypto investment that you are going to make is beneficial and profitable if your ROI is positive.
A negative ROI means that the trade you are making will not be profitable, and you might face a loss.
Why Does ROI Metric Matter?
For you as an investor, the ROI metric is a significant one. The metric is beneficial for crypto traders in understanding how profitable their investment can be. Precisely, it measures the efficiency of the crypto investment and offers you information on how this investment is doing compared to the initial ones.
You can even compare different trading operations using the ROI metric. The majority of traders analyze the ROI metric before investing in cryptocurrencies.
Overall, it serves as an excellent indicator for your crypto investments’ higher returns in the market. Therefore, you should ensure calculating this key measure before trading crypto.
How Can You Calculate ROI?
When it comes to calculating Return on Investment (ROI), the formula is essential and can be calculated by anyone with basic knowledge of the price history.
It consists of two fundamental values:
- Initial value of the trade
- Present value of the trade
The formula is as follows:
Present Value of Investment – Initial value of investment / Initial Value of Investment = Return on Investment (ROI)
After calculating the ROI, simply multiply it by 100, and you will receive the rate of return of your crypto investment.
Alternatively, we can also say that ROI is a net profit ratio to net costs on trade.
Why is the Metric Not Enough? Limitations of ROI
- RIO Does Not Consider the Time:
To know how well your investment is doing in the crypto world, you need to consider its time. Time can tell you more about the efficiency of your cryptocurrency investment.
- ROI Creates Confusion in Valuating Trades:
Factually, there are crypto traders that are still not aware of how to value their crypto coin. They are often confused when it comes to offering the correct value to the coins. Hence, ROI should have included the valuation factor in the metric to make understanding the profitability easier.
- ROI is Risky:
Often, people rely on the calculation of ROI that can sometimes be unpromising. If you want a higher ROI, you need to invest in a highly volatile crypto coin.
- ROI Fails to Tell About Asset Environment:
Your ROI calculation only tells you about the performance of your trade. Nonetheless, the digital market is full of risks and other shortcomings. Hence, using ROI alone to make a trading strategy will not help.
With significant advantages, ROI has some limitations as well. However, these limitations should not make you overlook the crucial metric. Therefore, the next time you devise a trading strategy, calculate the investment’s ROI beforehand.