level
Mid Level Reading
12 Jun, 2024

Average Annual Return (AAR)

[ Av-er-ij an-yoo-uhl ri-turn ]

The Average Annual Return is the asset return percentage divided by the total years in a time period.

Suchet Dhindsa Salvesen
Written by
Suchet Salvesen
Suchet Dhindsa Salvesen Suchet Salvesen Expert Author
Suchet is a Norwegian economist, entrepreneur, and investor, serving as the CFO and COO of Brainfund. With over a decade of experience in global expansion, venture capital, and emerging technologies, he earned his MBA from the NMBU School of Business & Economics. He held dual bachelor's degrees from the University of South-Eastern Norway. His career...
Michael Gord
Fact checked by
Michael Gord
Michael Gord Michael Gord Expert
Michael, co-founder, and CEO of Global Digital Assets (GDA) Group, is a distinguished figure in the blockchain and Metaverse industries, with a focus on capital markets. As the former Managing Director of the XDB Foundation and CEO of MLG Blockchain, he has been involved in over $25 billion of digital asset financings. A pioneer in...

What Is the Average Annual Return?

The Average Annual Return (AAR) is a simple calculation that divides the total returns by the number of years measured. Investors use it mostly on traditional stock markets to measure the average profits per year relative to the date compared. 

In crypto, AAR is only significant when compared with large time frames due to how quickly prices can change.

10-year ROI of Bitcoin vs other investments
10-year ROI of Bitcoin vs other investments | Source: CaseBitcoin.com

From the example chart above, Bitcoin has reached a 10-year return of over 120x since 2014. Specifically, prices increased by ~13,400% in 10 years and 1,050% in the past five. After the calculations, Bitcoin would have a 10-year AAR of 1,340% and a 5-year AAR of 105%.

How to Calculate Average Annual Return? 

The average annual return definition is straightforward: the return on investment (ROI) between two dates divided by the number of years measured.

blockquote icon

ROI (%) = [ (Current Value – Initial investment) / Initial investment ] * 100

blockquote icon

AAR (%) = ROI / Total years

Note: In traditional investing, the ROI would be affected by extra elements such as dividends and capital gains distributions (more details on that later). There are equivalents in crypto (e.g., staking rewards, and yield farming platforms). For simplicity, the examples consider only holding crypto assets.

If Bitcoin rises from $20,000 to $60,000 in 3 years, that’s a total ROI of 200%. The 3-Year AAR would be one-third, about +44%.

It’s worth noting that the average annual return meaning isn’t always the same. A positive AAR can still potentially be a bad investment. For example, if three yearly returns are +100%, 0%, and -50%, the AAR is +10% and doesn’t reflect the downtrend.

Elements of Average Annual Return (AAR)

Before calculating averages, annual returns can be added from multiple sources:

Asset Price Appreciation

The asset price appreciation measures the unrealized profit and loss (PnL) of holding a cryptocurrency within that year. Until then, the PnL can greatly change (even between -80% and +200%). For consistent tracking, traders calculate ROI with realized PnL (after selling tokens).

Capital Gains Distributions

Capital gains are profits realized after holding assets for at least one year. Mutual funds typically distribute annual capital gains as a way to spread and reduce taxes overall. US capital gains taxes are 0%, 15%, or 20%, depending on the income bracket.

This can result in unexpected tax bills for users who invest in mutual funds and still haven’t sold anything. Other products (such as Bitcoin ETFs, and exchange-traded funds) don’t have this.

Dividends

Some companies give back to investors part of their quarterly earnings to create a sense of stability and confidence. Similar practices exist in crypto:

  • In DeFi platforms, users earn free tokens for locking in their assets for 3-12 months (staking)
  • In decentralized exchanges (DEXs), users deposit their tokens temporarily to get a share of the exchange fee revenue
  • In real-world-asset (RWA) tokenization, crypto projects may generate revenue with similar business models to real-world companies. For example, buy real estate and distribute the net rental yield with token holders.

Conclusion

The AAR gives a broad overview of how profitable an asset has been in the long term. In the short term, however, crypto yearly returns can deviate a lot from the average. Bitcoin has seen both extremes, from -70% (2018) to +5,500% (2013). 

There are similar calculators worth comparing like the Compound Annual Growth Rate. For example, the 10-year Bitcoin ROI of 13,400% is a compounded CAGR of +63% per year. (A much more realistic annual return)

When analyzing AARs, it’s important to review the full data spectrum as well as the recent ROI trend.

doc ico
Article Sources
arrow ico

Coinweb requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial process.

Suchet Dhindsa Salvesen
Written by

Suchet is a Norwegian economist, entrepreneur, and investor, serving as the CFO and COO of Brainfund. With over a decade of experience in global expansion, venture capital, and emerging technologies, he earned his MBA from the NMBU School of Business & Economics. He held dual bachelor’s degrees from the University of South-Eastern Norway. His career spans roles at NextToMe, Get, and Conax before joining Everipedia, now Brainfund, in 2017.

More crypto lingo