Nicole is a professional journalist with 20 years of experience in writing and editing. Her expertise spans both the tech and financial industries. She has…
Return on investment (ROI) is a ratio that measures the gain or loss generated from an investment relative to its purchase cost. It provides a clear and standardized way to assess the performance of different investments, making it easier to compare their viability and potential results.
ROI is a common metric in traditional finance (TradFi), as well as cryptocurrency trading.
Whether you’re a seasoned investor, a business owner, or simply looking to make informed financial decisions, understanding it is key.
ROI is typically expressed as a ratio or percentage. The formula for a percentage is:
To take an example of ROI in the cryptocurrency market:
An investor buys 2 ETH at $1,500 each. The price rises to $1,800. They have an ROI of 0.20 or 20% on their $3,000 investment.
ROI is a relatively straightforward metric to interpret:
Understanding ROI is important for several reasons:
Investors should keep in mind that ROI has some limitations as a metric.
When comparing investments, one may appear to be more profitable, but it would be less efficient if it takes a longer time period to generate the return. For example, if a crypto trade took 12 months to reach a 60% ROI, it would be less efficient than a trade that took 7 months to reach a 50% ROI.
One solution to this is to consider annualized ROI to take the timescale into account.
Return on investment is a fundamental financial metric that helps investors evaluate and compare the potential profitability of investments to choose those with the highest potential returns.
Understanding ROI is key to making informed choices and maximizing investment profits.
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Nicole is a professional journalist with 20 years of experience in writing and editing. Her expertise spans both the tech and financial industries. She has developed expertise in covering commodity, equity, and cryptocurrency markets, as well as the latest trends across the technology sector, from semiconductors to electric vehicles. She holds a degree in Journalism from City University, London. Having embraced the digital nomad lifestyle, she can usually be found on the beach brushing sand out of her keyboard in between snorkeling trips.
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