The world of crypto trading can be confusing, especially with all the strategies, terms, and concepts you must understand.
When getting into crypto trading and investing, some things are more important to understand than others. You don’t need to be an expert on fundamental and technical analysis to invest in crypto, but certain basic terms are very good to learn about.
One of those is the Return on Investment (ROI) and its formula, which is commonly used in the trading world. Not just for crypto but anywhere you look when it comes to investing and trading financial assets.
Return on Investment, also commonly referred to as ROI, is a performance metric used to evaluate the efficiency of any sort of investment. The investment that ROI evaluates can be anything from a house to a cryptocurrency or NFT.
ROI can also refer to a comparison of the efficiency of a number of different investments. This means that ROI isn’t just used to evaluate a single investment but can also be used to compare different investments with each other.
You always want a high ROI. The higher the ROI on an investment, the more profit. Since ROI is a ratio between net income over a period of time and the cost of the investment, the ROI can be used to determine whether an investment has been successful or not. Of course, the success of an investment isn’t just determined by the ROI, as the investment goal, strategy, and time frame will also play a role.
Calculating an ROI is fairly simple and can be done through a brief formula. ROI is calculated as the ratio of the net gain from an investment to the cost of the investment.
You will usually see the ROI expressed as a percentage which is often used to evaluate the potential return from an investment or to compare the performance of different investments.
An ROI can be calculated by the following:
In this formula, “Net profit of the investment” refers to the profit earned from the investment after all expenses and costs have been subtracted, and “Cost of Investment” refers to the total amount of money invested.
Take, for example, an investment of $1000 into a certain cryptocurrency. If that currency’s value goes up with time to a point where the total investment is worth $2000, the ROI will be at 100%.
If you want to dive deeper into ROI, you can add the annual ROI to the calculations. The annual ROI is the return you get on a yearly basis. One thing is knowing the total ROI from when you bought an asset, another is learning how much you earn on that investment on a yearly basis.
Now that you know the purpose of ROI and how to calculate it, what is it even good for?
ROI is a great tool to learn how much you have profited from an investment or to several investments in your portfolio to see what is performing the best. The real use for ROI isn’t just to see how much money you racked up on a percentage basis; it can be very useful when evaluating an investment portfolio.
We all invest in things to make as much money as possible, and that is no different in crypto. If you have a crypto investing portfolio of several assets, then it’s always a good idea to keep track of your ROIs. These will tell you which investments are performing in accordance with your investment strategy.
Sure, some investments might not have the highest ROI compared to others, but that shouldn’t matter if you made the investment with a long-term strategy and low-risk potential. Other assets can have an extremely high ROI over a short period of time, but those might also be the most volatile investments that can go south just as fast.
The point of this is to use ROI as an indicator for your own evaluation, but always keep other factors that go into your investment strategy in mind. An ROI of 30% over five years can be extremely good if it means that your funds are invested in something you find safe. An ROI of 150% over one year is impressive and fun, but it can also indicate that it’s time to secure some profits and sell.
Besides this general use for ROI, we’ll send you off with a few other uses for the popular investment formula.
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