What Is ROI?
ROI, or Return on Investment, is a metric utilized by cryptocurrency traders to assess the performance and effectiveness of a crypto investment or to compare the performance of multiple crypto investments within a portfolio.
Return on Investment (ROI) | Source: Investopeida
The Significance of ROI
Keeping track of the ROI figure is crucial for cryptocurrency traders as it enables them to adjust their cryptocurrency portfolios accordingly.
A positive ROI indicates that the crypto investment generates profits, while a negative ROI value indicates a loss-making venture.
Investors considering investing in a crypto project through a token sale often inquire about the ROI or the projected ROI.
A Fundamental Formula
The calculation of ROI involves subtracting the initial value of the investment from the present value of the investment and then dividing this amount by the initial value of the investment.
The formula is as follows:
ROI = (Present Value of Investment – Initial Value of Investment) / Initial Value of Investment
The rate of return is then calculated by multiplying the ROI by 100.
It is important to note that there are limitations to using ROI as a measure of cryptocurrency profitability.
A Comprehensive Measure for Investments
ROI does not account for the period.
One trader may need to hold onto their cryptocurrency investment for a longer period than another, resulting in a potentially less profitable ROI for the former trader.
However, the ROI figure does not reflect this difference.
A higher ROI can be achieved by increasing profits and reducing expenses.
While this may inflate the ROI figure, it may also lead to higher expenses and future performance issues for the crypto project.
In summary, ROI is a valuable indicator of cryptocurrency success, but it should be considered alongside other factors when evaluating the performance of crypto assets.