How to Calculate Return on Investment (ROI) For Crypto?

You can learn plenty of things about cryptocurrencies by looking at an asset’s Return on Investment or ROI. But you’ll need to know how to calculate ROI while figuring out what it means when looking for an investment. The limits of this measurement are also essential for investors to explore.

What Is Crypto ROI?

Understanding what is ROI in crypto is critical to helping you see what you can expect in your asset. The Return on Investment or ROI for a cryptocurrency is the current value of an asset versus the amount you paid for the asset or its original value. The comparison helps you see how the cryptocurrency has changed in value since your acquisition.

You can use crypto ROI to measure how well your asset performs to your standards. By comparing the current value of the asset with its original value, you’re looking to see if your asset is trending upward or if there’s a risk of the coin not providing the return you want.

You can also use the ROI to review how currencies are performing before investing in them. For instance, you can look at what you would have paid for a currency a while back and then compare it with its current value. Comparing these two points will help you see how well a coin performs, but you’d also need to review the underlying factors surrounding why the ROI is where it is.

How to Calculate the ROI for Crypto?

Base Formula

Here is a formula you can use to calculate your crypto ROI:

ROI = (FVI – IVI) / IVI * 100

• The FVI or Final Value of Investment is the current value of the crypto asset.
• The IVI is the Initial Value of Investment and what you paid for it.
• The ROI is the percentage return you’re earning or losing from the deal.

For example, you might have obtained Ethereum at $1,700. The value is currently at $1,950. Therefore, 1950 will be the FVI, and the IVI will be 1700:

(1950 – 1700) / 1700 * 100

You will get 250 and then divide it by 1700 to get 0.1471. Multiply that by 100 to get 14.71.

This calculation means you’re getting a 14.71% ROI on your investment. This return means you’re getting a profit, and your investment is working well.

But let’s say that the FVI and IVI were the other way around, as you obtained Ethereum a $1,950, and it’s now at $1,700. You would get -250 at that point, which when divided by 1700 and then multiplied by 100 results in -14.71%. This calculation means you’re losing a sizeable amount of money on your investment.

The base formula helps you compare your original investment and its current value, showing how well it works.

Formula With Transaction Fees

The formula for calculating your crypto ROI will be different when you put transaction fees into consideration:

ROI – (FVI – Expenses – IVI) / IVI * 100

Let’s go back to the Ethereum example from the last segment. For instance, you might have had a transaction fee of $25 at the start. In this situation, we’ll put 25 into the expenses segment:

(1950 – 25 – 1700) / 1700 * 100

You will divide 225 by 1700 to get 0.1324 and multiply it by 100 to get a 13.24% ROI.

Incorporating the transaction fees into your ROI calculation can help you get a more realistic look at how much you’re earning from your asset. While the ROI will be lower regardless of whether it’s a profit or loss, it also helps you understand how much of a profit or loss you’re getting. Be sure when completing a transaction that you record how much you spent in fees to help you find a more accurate ROI measurement.

What Is Annualized ROI?

Another crypto ROI measurement you can use entails the annualized ROI. The annualized ROI puts the amount of time you’ve held an investment into consideration. This measurement can be more useful than a standard ROI review because you’re looking at how well the asset performs in the long run.

The annualized ROI formula here is this:

ROI = ((1 ROI) 1 / (n – 1)) * 100

n refers to the number of years you’ve held an investment. (1 ROI) measures the initial ROI you’ve held since your investment began.

For instance, the ROI for your current crypto investment you have held for five years might be 14.71%. You’ll take 0.1471 and then divide it by 4 to get 0.036775. You can multiply it by 100 to get an annualized ROI of 3.68%.

This total suggests that you’ve gotten a small return every year over the past five years. The ROI might not seem like much, but it is steady.

The annualized approach also helps you compare how well your crypto asset has changed in value versus the time value of money. Inflation causes the value of your money to change after a while. An ROI above the inflation rate is always positive, while an ROI below that rate could be a concern even if the ROI is positive.

Alternative ROI Calculation

There are three alternative ROI calculation options available for your use:

1. ROI = Money I Gained – Money I Spent / Total Cost of Investment

This formula is a more simplified version of the initial crypto ROI calculation. The total cost could be the same as what you spent on the asset, although you could incorporate transaction fees into this point.

2. ROI = Investment Net Income / Total Cost of Investment

The Investment Net Income is essentially the same as the (Money I Gained – Money I Spent) measurement.

3. ROI = Investment Gain / Investment Base

This third option is also the same as the second one.

These three different calculations are all the same, focusing on calculating what you’ve gained or lost versus what you spent the first time around. They are simple ways of explaining what the crypto ROI is, which can help you understand what to expect when managing your investment.

What Are the Limitations of ROI In the Crypto Market?

While calculating your ROI on your crypto investments can help you see what you’ve gotten from your investment, it won’t always provide all the information you want. Here are a few common limits of ROI:

1. Time isn’t a factor unless you use the annualized ROI measurement.

One critical problem with the ROI measurement is that the basic analysis doesn’t consider time. You’d have to use the annualized ROI measurement to determine if your investment is good. You can use this measurement to help you compare the ROI you get each year with how inflation might influence the value of money.

2. Underlying factors influencing your asset won’t be a factor.

The crypto ROI doesn’t consider the current asset environment. There could be various reasons why an asset’s value is rising or falling. There might have been a hard fork in an investment, or there could have been a substantial liquidity shift in a currency.

Many currencies are also ones that remain dormant for a while before their values start to change. These shifts could come from various situations or events. You’ll have to look at the historical events surrounding your asset to see if something is worthwhile.

3. The ROI doesn’t always factor in expenses.

You’ll work with various expenses when obtaining cryptocurrencies, including wallet and exchange fees. Your ROI won’t incorporate expenses unless you use a formula that puts transaction fees into consideration.

4. Risk isn’t included in ROI.

While some assets with high ROI totals sound great, they could also be risky and drop in value. Some of the riskiest investments are also the ones with the highest ROIs. You’ll have to analyze the volatility of an asset and other factors surrounding how it works before you attempt to make an investment.

What Are the ROIs for Other Top Cryptocurrencies?

Various cryptocurrencies have seen some substantial ROIs from 2020 to 2023. Here’s a look at five of the top coins on the market and their ROIs over a three-year period from 2023 to 2023:

Top 5 Coins	3Y ROI (2020-2023)
BTC	168%
ETH	439%
Cardano/ADA	100%
BNB	1107%
XRP	84%

For instance, if you were to invest in Bitcoin at the start of 2020, you would have gotten an ROI of 168% over a three-year period. This means that if you invested $5,000 as 2020 began, you would have $13,400 after three years. You would have an $8,400 profit on your initial investment of $5,000, which results in a 168% increase. This measurement shows that the currency you invested in was very positive.

Meanwhile, Ethereum and BNB both saw greater returns, meaning you would have been rewarded even more over three years with ETH or BNB than if you had invested in BTC. Cardano/ADA would have doubled in value during those three years, while XRP saw a substantial rise but hasn’t gotten to where its value has doubled.

But it’s also critical to understand the underlying factors of why these ROIs are different. BNB had mostly dormant in 2020, and it wasn’t until 2021 that the currency started to become liquid. While BNB saw a rise from $15 to $30 as 2020 progressed, it wasn’t very liquid. Trading in earnest began in 2021, with the currency going above $500 at varying points. But the value dropped quickly in 2022, eventually reaching $250 at the end of 2022.

The example of BNB shows that while the ROI on something can be appealing, you also have to review why the ROI is at that point. The measurement could be misleading in some situations, as you’re not getting an idea of what the risks for an investment might be.

Conclusions

Knowing what is ROI in crypto is critical to helping you see how well your investment is working. You can also use the ROI to see how well a currency has performed in recent times before you enter that investment.

But make sure when looking at the ROI that you know what to expect. Be cautious when checking this measurement, as a high ROI doesn’t mean the currency will be successful in the future. The reasons why an ROI might be where it is can vary.