Understanding Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is a metric that provides the geometric progression ratio that offers a smoothed annual growth rate, ignoring the effects of volatility and fluctuations during a specific period.
Formula
CAGR = ((EV / BV) ^ (1/N)) – 1
Where:
- EV is the ending value of the investment
- BV is the beginning value of the investment
- N is the number of years
Example:
Let’s assume you invested in a cryptocurrency called Coinweb token in 2020.
- Beginning value in 2020: $100
- Ending value in 2023: $500
- Number of years (N): 3
Plugging these numbers into our CAGR formula:
CAGR = ((500 / 100) ^ (1/3)) – 1
Plug in the values and solve:
CAGR = (5 ^ (1/3)) – 1
This means the Coinweb token grew at an average rate of approximately 44% per year from 2020 to 2023.