Summary:
- Rate of return, or RoR, is a key metric that investors use to measure the performance of their investments over time.
- Rate of return can be used to measure the performance of an individual crypto asset or a collection of crypto assets.
- Rate of return should not be the sole factor in making investment decisions; investors should also consider other factors such as market capitalization, trading volume, and price history.
What Is Rate of Return (RoR)?
The rate of return (RoR) is the rate at which an investment grows over time. It is the net gain or loss on an investment over a specific period, expressed as a percentage of the original investment. For example, if you invest $100 in stock, and the stock goes up by $20, your rate of return would be expressed as a percentage. In this case, the rate of return would be 20%.
The rate of return includes both the income generated by the investment (dividends, interest, and capital gains) as well as any changes in the value of the asset itself.
Rate of return can be used for any type of investment, including stocks, bonds, mutual funds, real estate, and cryptocurrency. The main idea is to compare the rate of return on different assets of the same type to make informed decisions about where best to invest your money.
If a particular type of investment has a track record of producing a high rate of return, you may want to consider investing in it. On the other hand, if an asset has a history of losing money, it may be better to steer clear of it.
Comparing rates of return can also help you determine how risky an investment is. For example, assets with high return rates are typically considered riskier than those with low rates of return.
Many investors will often choose a required rate of return that they need to generate to make an investment, and compare it to the rate of return that the investment is expected to generate–this helps them determine whether or not the investment is worth the risk.
There are different rates of return, and your chosen method for finding the rate of return will depend on your investment goals.
Nominal Rate of Return vs. Real Rate of Return
There are two main types of rate of return – nominal and real. The nominal rate of return is the rate of return that is reported without considering inflation. The real rate of return is the rate of return that is adjusted for inflation.
Using the same example, let’s say you invest $100 in a stock that goes up by $20 over the course of one year. Again, the nominal rate of return would be 20%.
However, if inflation is at a rate of 5%, the real rate of return would be lower than 20% because the purchasing power of your money has decreased due to inflation.
Internal Rate of Return (IRR) vs. Rate on Investment (ROI)
A particular metric is often confused with simple rate of return, and this is the internal rate of return (IRR). The IRR is a discount rate that makes the net present value (NPV) of all cash flows from an investment equal zero. The IRR can also be seen as the annual growth rate that an investment will earn. Typically, when the IRR of a project is high, it means that the project is a good investment.
The rate of return on investment (ROI) is a different metric altogether. ROI measures how much money an asset has earned relative to the amount invested. It is calculated by taking the gain or loss from an investment and dividing it by the cost of the investment. For example, if you spend $200 on a stock and it goes up by $20, your ROI would be 10%. If the stock goes down by $20, your ROI would be -10%.
What is Personal Rate of Return (PRR)?
Another rate often used in investing is the personal rate of return (PRR). The PRR is the rate of return that an investor earns on their investments within a given time period. It takes into account the changes in the value of the investment and any cash flows that the investment generates (such as dividends or interest payments).
Many investors often ask, “What is a good personal rate of return?”; realistically, there is no easy answer. It depends on several factors, such as investment goals and risk tolerance. However, as a general rule of thumb, most investors would be happy to earn a PRR that is higher than the current rate of inflation.
How to Calculate Rate of Return
There are several ways to calculate the rate of return on an asset. The most common method is simply dividing the total gain or loss on an investment by the amount of money originally invested. This can be done with the rate of return formula:
Rate of return (RoR) = [(current value – initial value) / initial value] x 100
This formula will give you the rate of return calculation as a percentage.
Using the same example, let’s say you invest $100 in stock, and the stock goes up by $20. Using the rate of return formula, nominal rate of return will be calculated as:
RoR = [(120 – 100) / 100] x 100 = 0.2 x 100 = 20%
The simple or nominal rate of return formula is a good place to start, but it doesn’t take into account the time value of money or inflation.
In order to calculate the real rate of return, you would need to use a different formula, which takes into account the rate of inflation.
The real rate of return formula is as follows:
Real rate of return = (1 + Nominal Rate) / (1 + Inflation Rate) – 1
For example, let’s say you invest $100 in stock, and the stock goes up by $20 over the course of one year. So the nominal rate of return would be 20%.
However, if inflation is at a rate of 5%, the real rate of return would be lower than 20% because the purchasing power of your money has decreased due to inflation.
With that in mind, the real rate of return formula would look like this:
Real rate of return = (1 + 0.2) / (1 + 0.05) – 1 = (1.2 / 1.05) – 1 = 0.1428 = 14.28%
As you can see, the real rate of return is lower than the nominal rate of return, because inflation has eroded some of the returns of that investment.
How to Use Rate of Return in Crypto Trading
Now that we know what rate of return is and how to calculate it, let’s take a look at how it can be used in crypto trading. Rate of return can be a useful tool for crypto traders in a few different ways:
- Measure crypto asset performance
Rate of return can be used to measure the performance of a particular crypto asset. For example, let’s say you’re considering investing in Bitcoin, but you’re not sure which exchange to use. By looking at the rate of return for each exchange, you can get an idea of which one is performing the best.
- Evaluate crypto trading strategies
Rate of return can be used to measure the performance of a crypto trading strategy. In this case, let’s assume you’re employing a simple buy-and-hold strategy. By calculating the rate of return for your strategy, you can see how well it is performing. If the rate of return is positive, it means that your strategy is making money, but if the rate of return is negative, it means that your strategy is losing money.
- Compare crypto assets
Crypto rate of return can be used to compare the performance of different crypto assets. For example, if you’re thinking about investing in Bitcoin and Ethereum, you can get an idea of which one is performing better by looking at the rate of return for each asset. As a rule of thumb, when comparing crypto assets using the rate of return strategy, the cryptocurrency with the higher rate of return is typically the better investment.
Conclusion
Rate of return, or RoR, is a key metric that investors use to measure the performance of their investments. It tells you how much your investment has grown or shrunk over a period of time.
Rate of return can be a useful tool in crypto trading, as it can help you assess whether a particular coin is a good investment. By calculating the RoR of a crypto asset, you can get an idea of how much it has grown or shrunk over a period of time which can be helpful in making buy or sell decisions.
However, it is important to keep in mind that rate of return is only one metric, and it should not be the sole factor in making investment decisions. You should also consider other factors such as the coin’s market capitalization, trading volume, and price history before making any investment decisions.
