Keeping up with the fast-paced developments in the cryptocurrency space is hard enough.
But for people with multiple investments in assets both on and off the blockchain who want to keep track of the ever-changing value of their various holdings — it’s even harder.
Crypto ROI is a valuable metric to keep track of, but it also has its downsides to consider and it can take a lot of work if you don’t find a way to automate the process.
Learn more about why you should be finding and monitoring your crypto ROI as well as IRR — and how to do so in an effective way.
What is Crypto ROI?
Return on investment (ROI) compares the current value of an asset to its original value (aka the price you paid for it) to determine how it’s changed in value since you acquired it.
Crypto ROI is a commonly used metric among Bitcoin, Ethereum, and altcoin traders to help determine whether a certain investment is worth it, or if the assets in which you’ve already invested are performing to your standards.
A positive ROI number is typically associated with a good investment, because it shows an asset is trending up in value. An ROI number that’s negative means an asset has dropped in value. Crypto assets with a negative ROI should be handled with caution, as they may never return the value you’re hoping to receive from your investment.
Return on investment is found by subtracting the initial value of the investment from the current value of the investment, dividing that number by the initial value of the investment, then multiplying that total by 100 to turn your result into a percentage.
Here’s what that formula looks like in practice:
Return on Investment Percentage = [(Present value of investment - Initial value of investment) / Initial value of investment] x 100
Example: Calculating the ROI of a Bitcoin Investment
How would you calculate the ROI of a cryptocurrency investment using the above formula? Here’s a walk-through of a real-life example.
Let’s say you bought a Bitcoin for $10,000 USD and you want to calculate what your return on that investment is now. If that Bitcoin is worth $40,000 USD today, here’s what your equation would look like:
Return on Investment Percentage = [(40,000 - 10,000) / 10,000] x 100
That makes the ROI of your Bitcoin purchase 300%. Sounds like a smart investment!
Why Measure Return on Investment for Cryptocurrency?
There are a couple of reasons that ROI is such a widely used metric in the crypto space and beyond.
Optimize Your Investment Portfolio
As we touched on earlier, finding the ROI of a crypto investment is important for understanding how it’s performing. With your crypto ROI identified, you can tell if an investment you’ve already made is generating the returns you’re looking for. If it’s not, it might be best for your portfolio to sell that asset, buy another, and improve your bottom line.
Know When You’re Ready for Another Investment
Knowing what kind of money an investment is generating is invaluable to calculating the cash flow available from your portfolio. Having positive cash flow is crucial for making new investments and growing your portfolio. That means having a clear understanding of that cash flow is even more crucial.
The Pitfalls of Depending on Crypto ROI
Despite its usefulness and popularity, there are some downsides of the crypto ROI metric of which every investor should be aware.
ROI Doesn’t Account for Risk
Investments aren’t just about return — there’s also a varying amount of risk associated with each asset that should be carefully considered. ROI doesn’t have the capability to account for this risk.
The reason this matters is that, often, it’s the riskiest investments that end up creating the highest returns. If you were to rely on ROI alone to make investment decisions, you could get burned by a volatile investment that looks great from an ROI perspective but is too shaky to perform as hoped.
The cryptocurrency market is a great place to see this lesson in action. When it comes to crypto, newer coins are able to boast downright stunning ROI numbers. But of course, investors only reap this value if these coins break through to the mainstream and gain traction. The potential ROI is large, but so is the risk of losing everything you’ve invested.
It Isn’t Easy to Track Expenses With ROI
Another thing the crypto ROI formula can’t account for is the ongoing costs associated with an investment.
In the crypto space, costs like transaction fees can really rack up and also change quickly. This variability means it’s easy to end up spending more than expected on an asset, which can quickly push the investment out of the black and into the red. In addition, with unpredictable expenses, even the expected ROI of a crypto investment is hard to nail down. That makes it difficult to compare apples to apples and tell how an asset is performing — or if it’s a good fit for your portfolio in the first place.
Time Is Typically Ignored When Calculating ROI
The final main downfall of crypto ROI is another element it doesn’t account for — the passage of time.
An asset that appreciates from $100 to $200 in one year is much different than an asset that does the same over the course of a decade. They have the same ROI on paper, but the time difference in appreciation makes one investment impressive and puts the other closer to being a burden.
All told, crypto ROI should be just one of the factors that goes into making an investment decision, as it provides a helpful barometer but stops short of telling the whole story.
However, there is another metric that’s similar to ROI but that also takes time, expenditures, and additional investments into account when measuring asset performance.
Meet internal rate of return.
Crypto ROI vs. IRR
Internal rate of return (IRR) is another metric used across the financial world to estimate the profitability of a potential investment or the performance of a current one.
Just like ROI, the higher this number — also represented as a percentage — the better an investment is likely to perform.
But unlike ROI, IRR looks at annual growth rate and also includes cash flowing into and out of an investment over the course of a year. ROI simply looks at total growth with nothing else considered. So while ROI and IRR numbers may be similar when an asset is just a year old, they’ll grow further apart as time goes on, you move resources in and out, and appreciation naturally occurs.
Because IRR takes more elements into account, it’s better than ROI for comparing different types of assets. This makes it more accurate for ranking multiple investments to determine which are worth making or holding on to.
The reason IRR isn’t as widely used as ROI is that it requires a complex formula with a lot of variables. But today, software has made calculating IRR much more attainable. If you’d like to take advantage of this kind of software, keep reading.
Quickly Find the IRR of All Your Crypto Investments With Kubera
Kubera is a complete wealth-tracker app where you can measure and monitor the value — and growth — of traditional assets as well as digital assets like crypto, DeFi, NFTs, and pretty much any other item that can be owned. With Kubera’s automatic IRR calculator, users can dive deeper into the performance of any of these assets.
Inside Kubera’s easy-to-use platform, you can enter all the information about an asset — from its name to any important attachments to its cost, current value, and cash flow in or out of the asset. Kubera will take these elements, as well as time passed, into account to automatically calculate the IRR of an asset.
In addition, Kubera allows you to see how the IRR of an asset stacks up against popular indices and tickers like the S&P 500, Bitcoin (BTC), Apple (AAPL), etc. for the same time frame — helping you determine whether your investment performance is good when compared to industry standards.
To show you how you might apply this feature from Kubera to your real life, let’s use it to find the IRR of an investment property:
- Initial investment 5 years ago: $500,000
- Expenditure 3 years ago (remodel): $50,000
- Yearly expenditure (property tax): ~$4,000
- Yearly Expenditure (maintenance): ~$2,000
- Yearly Deposit (rent collected ): ~$60,000
- Current value of investment: $1.15 Million
When all of this information is plugged into Kubera, we see that the IRR is close to 23%. That’s better performance than the S&P 500 and Dow Jones, but not as good as Tesla stock. Thanks to these benchmarks, you can determine whether you’re pleased with your asset’s performance or whether it’s time to get rid of it to upgrade to an asset that better meets your goals.
To learn exactly how Kubera’s IRR calculator works, and check out a video clip of it in action, check out our IRR help center article.
There’s another way to see all of Kubera’s features in full force — sign up for a personal subscription. Or, partner up with your financial advisor, wealth manager, or other fiscal pro to see how you can use Kubera together to measure, manage, and take advantage of IRR.