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What is Return On Investment (ROI)?

Written by

Emmanuel O.

Reviewed by

Artem Goryushin

Fact checked by

Andrew Strassmore

May 6, 2023

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Elementary

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Definition

Return on Investment, commonly abbreviated as ROI, is a ratio or percentage figure that measures the profitability or effectiveness of a particular business or investment. It is an easy-to-use tool that may produce percentage values (35%, for example) or absolute ratios (like 0,35). Because of this, ROI can be used to compare various investment options or trading strategies.

Understanding ROI

When it comes to investing, there is always the possibility of gaining a lot of money in return. Still, there is also the possibility of getting very little or nothing in return when you venture into such an investment.

A wise investor, on the other hand, will always play it safe by conducting a rate-of-return analysis before investing in any assets.

The return on investment (ROI) statistic is used to determine the profitability of an investment. ROI compares the amount you invested in an asset to the amount you earn from such an asset; this determines the efficiency of your investment.

The return on investment (ROI) is measured explicitly in terms of the investment’s acquisition cost. Thus, the return (net profit) is divided by the sum of the acquisition expenses when calculating ROI (net cost). To obtain the percentage value, multiply the result by 100.

Crypto traders must observe the ROI figure and adjust their portfolios as necessary. A positive ROI indicates the cryptocurrency investment is profitable, whereas a negative ROI value suggests that the investment might be at a loss.

How to Calculate ROI?

ROI is calculated by deducting the initial investment’s value from its present value and multiplying that result by the original investment’s value.

The formula is:

ROI = (Current Value – Total Cost) / Total Cost

Alternatively, it may be written as:

ROI = Net Profit / Net Cost

Example: John spent \$1,500 to purchase 100 units of BNB at the rate of \$15 each; due to a major fundamental from the Binance ecosystem, the current price of one BNB is \$26. Using the above formula, John will have an ROI of 0.73 or 73%.

Both traditional and cryptocurrency markets extensively use ROI. But the major constraint to applying the above formula is that it has no provision for the time factor.

Because when it comes to determining the viability of two investments, one can appear to be more profitable than another, but in truth, its efficiency was lower because it consumed a lot more time.

The Top 5 Tips for a Positive Return when Investing in Cryptocurrency

Pick Tokens With High Potential

Users of cryptocurrencies can extensively research emerging tokens with good use cases and invest in them if they want to make large profits in the long run.

Asset Diversification

When it comes to building a robust investment portfolio, the use of different high-potential cryptocurrencies should be considered. Because a diversified portfolio makes sure that even if one of your assets is declining, your investments won’t experience volatility.

Long-Term Investing

One of the most widely used recommendations for cryptocurrency trading is to invest for the long term. Users that have faith in a cryptocurrency project can purchase the token and hold it for several years.

Always Set a Stop-Loss

Stop-loss is one of the best risk management measures for crypto traders; it’s a predetermined order to sell a specific asset when it reaches a certain degree of decline. Successful traders use this technique to prevent further value loss and ensure timely transaction exits.

Leverage Assets

Leverage trading is a high-risk investment adventure that requires a reasonable level of trading knowledge and skill; with leverage, users of cryptocurrencies can increase the value of their position without adding more money to their accounts. However, users can end up with losses or gains.

Nominal Rate of Return vs Real Rate of Return

Nominal and real rates of return are the two main types of RoR. The rate of return reported without considering inflation is called the nominal rate of return, while the rate of return prorated for inflation is known as the real rate of return.

The nominal rate of return would be 20% if you invested \$300 in a stock that increased by \$60 over a year.

However, if inflation is at a 5% rate, the real rate of return would be less than 20% because inflation has reduced the purchasing power of your money.

• It can be calculated anywhere and anytime.
• Requires a simple model with fundamental data requirements.
• It can be applied in crypto, real estate, stocks, etc.
• Cost-effective
• Requires no special expert knowledge

• The formula has no regard for time.
• Ignores the size of projects
• Ignores the possible future cost
• Ignores existing re-investment rates

Conclusion

Investors frequently use the rate of return, also known as RoR, to gauge the effectiveness of their investments. It provides information on how much your investment has increased or decreased over time.

The rate of return is a helpful indicator when trading cryptocurrencies since it can help you decide whether a given coin is a wise investment. You can determine how much a cryptocurrency asset has grown or decreased over time by calculating its RoR. This information can help you decide whether to buy or sell the asset.

Nevertheless, it’s essential to understand that rate of return is merely one indicator and shouldn’t be the only consideration when making investment selections. Before making any investment decisions, you should consider other aspects, including the coin’s market capitalization, trading volume, and price history.

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