Short for “Return on Investment,” the ratio between the net profit and cost of investing.
ROI is a metric used by cryptocurrency traders to measure the performance and the efficacy of a crypto investment, or to compare the performance of multiple crypto investments in a portfolio.
It is important for cryptocurrency traders to stay abreast of the ROI figure and tweak their cryptocurrency portfolios accordingly.
A positive ROI figure means the crypto investment is making profits meanwhile a negative ROI value reflects a loss-making venture.
Investors looking to invest in a crypto project through a token sale may ask to see the ROI or the projected ROI.
ROI is calculated by 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:
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.
There are some limitations associated with using ROI to evaluate cryptocurrency profitability.
ROI does not account for the time period. A trader looking to sell cryptocurrency may have to wait for a much longer period than another crypto trader looking to sell. In this case, the ROI of the former trader may be less profitable, but the ROI figure does not reflect this.
A higher ROI can be achieved by increasing profits and reducing expenses. While this may inflate the ROI figure, it may lead to higher expenses and cause performance issues for the crypto project further down the line.
In summary, ROI is a useful barometer of cryptocurrency success, but it should be used alongside other factors when evaluating the success of crypto assets.