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The Crypto market is a tricky one, so it’s only apt for investors to conduct proper analysis before joining the industry. Once there, the next big thing is evaluating how the strategies are performing vis a vis the investment venture being undertaken. This may seem a complex process, but it’s actually a simple one when you understand how the Return on Investment functions. It primarily serves as a tool to guide decision-making, especially for high-risk financial transactions, such as cryptocurrency. But whether it’s a small or large capital, ROI can be of great help to ensure that your decisions are sound and reasonable.
The trend nowadays is that many people simply join the crypto industry without even knowing all the factors at play. So, as a result, it is not uncommon to hear some investors say, “it’s not worth it!”. But, essentially, the fault lies in the failure to read and master the rules of the game. It is not a place for people who simply rely on miracles or luck because those who succeed in this type of investment did enough research and analysis. Their decisions are based on facts, and it made a huge difference in the outcomes. You ought to do the same to expect the same result, and this article will familiarize you with ROI and how you can use it to your best advantage. To start an investment with a beginner-friendly, yet regulated platform, visit bitcoin-trader.app.
Understanding Return on Investment
Large companies and smart individual investors would normally employ Return on Investment to assess business opportunities. ROI is essentially a performance measure to evaluate the profitability of an investment or in comparison with other investments. In actual application, people use this to calculate the possible amount of return on a particular investment relative to the cost.
The calculation of ROI is not complicated and relatively easy to interpret for its broad applications. It has a simple formula: the projected return of an investment is divided by the cost of the investment, and the result is expressed as a ratio or percentage. If the outcome is net positive, it could be a worthwhile investment. Otherwise, when the ROI is negative, the opportunity should not be considered. In case there are multiple investment options, the investor must prioritize the one with higher ROI.
However, in a broader context, a “good” ROI depends on other factors, such as the risk tolerance of the investor and the time needed for the investment to generate returns. Some investors who avoid handling risky investments would likely choose the option with lower ROI. Inversely, if the investment would take a longer period to acquire profits, the option with higher ROI is preferable.
Calculating the ROI for Cryptocurrency
Cryptocurrency is considered a speculative and highly risky asset. To manage it carefully, investors should calculate the ROI by reducing the original price of a cryptocurrency from its selling price. After that, the actual result should be divided by the total cost of the investment.
For instance, if you purchase some cryptos for $6,000 and sell them for $24,000, the ROI would be 3.0. It can also be interpreted as earning three times (300%) from your original investment. However, it’s also important to consider other things such as the transaction fees and overall liquidity of the asset to determine the actual gains. In other words, a simple ROI figure may not provide exact performance measures, and further research may be needed.
ROI is Useful, But May Not be Enough!
Investors can benefit from the use of ROI during the pre-and actual investment activities. But there are a few factors that the tool might ignore. These are explained below from an overall market perspective.
- Time is not considered a crucial factor in the calculation of ROI. In general application, it does not specify such an element. Hence, some experts would have their own progress evaluation in a fixed schedule depending on goals or priorities.
- ROI serves as a guide for investment performance, but it does not explain the business environment. Meaning, investors may not be able to identify market risks and changes in liquidity.
- Investors may need additional calculations to understand the exact value of assets, especially when there is inflation. Since ROI calculation compares the current price and the original cost, the figures may not coincide with the result.
Conclusion
Return on Investment can be an effective tool for investors in making crucial decisions related to cryptocurrency transactions. The selling and buying of these digital currencies would require sober analysis at the outset and also during the process. But since ROI is not enough on certain occasions, investors are encouraged to complement it with other strategies that are appropriate to identified goals.
Reviewed and edited by Albert Fang.
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Article Title: Calculating Return on Investment: A Guide for Crypto Investors
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