How to Understand Profits from Cryptocurrency Investments
Understanding profits from cryptocurrency investments is a major source of confusion among investors, especially for those new to the space. Specifically, cryptocurrency investors are confused by two factors: the number of assets involved and changing units of account.
Let’s break these factors down and explain the role they play in cryptocurrency investing.
Unit of Account
To better understand cryptocurrency P&L, we need to first learn one of the main characteristics of a currency — unit of account. Wikipedia defines a unit of account as:
“a nominal monetary unit of measure or currency used to represent the real value (or cost) of any economic item”
A car can be worth $15,000 or € 12,500 or 10 ounces of gold or 5 cows (yes, the cow was a currency once) depending on the prevailing currency in the economy.
Similarly, in cryptocurrency markets, the unit of account can be USD, BTC, ETH or anything out of the more than 1500 currencies available depending on the investors’ preference. This is where things start to get complicated for crypto investors.
In traditional markets, an investor can simply look at the current price of the asset (e.g. stocks) and calculate the profits in the fiat currency. Cryptocurrencies, however, are more complicated due to their pairing with multiple currencies (a.k.a. multiple assets).
For example, let’s say I bought a token X at a price of 0.00025 BTC last month. Today, the price is 0.00030 BTC, so currently I have gained 20% excluding any fees. Now for the same transaction, let’s say the BTC price on the buy date was $15,000. Today, the price dropped to $10,000, so the buying price of X was $3.75 and the current price sits at $3.00 which means that I have lost 20% in dollar terms.
In other words, the P&L of my X token can be expressed in many ways depending on the fiat or other cryptocurrency I choose. Traditionally, we would simply view this in our fiat, but cryptocurrencies are anything but traditional.
Simplify the Profit Tracking Process
Just as with any realm of investing, understanding the nuances of cryptocurrencies will make tracking your investments all the easier. We recommend you follow three guidelines to make profit tracking easier:
1. Know your unit of account: it helps to keep a unit of account consistent, at least for the same transaction, if not for the entire portfolio. For instance, you may decide to measure your ETH gain against USD and your BAT gains against BTC. However, it would only confuse you to switch these conversions around at the next market movement (even if it would make your investment look profitable).
2. Know what you are selling and buying: Cryptocurrency markets are different from traditional markets in another way: intermediate or entry-point currency. You cannot buy most coins using fiat directly, and instead have to buy through BTC, ETH or some other currency pair. For example, if you have USD and you want to buy Basic Attention Tokens (BAT), and BAT/USD is not an existing pair, you will have to convert USD to BTC first and then buy BAT. For profit calculations, you can ignore the intermediate BTC.
3. Know your fees: Just like with traditional investing, fees can add up. Commissions, withdrawals, transactions, and conversions can all have a significant impact on your profits.
Tracking Crypto Profits with Cryptorai
We at Cryptorai have designed our profit calculation feature with the above points in mind. New and potential users should keep in mind that with Cryptorai:
· Investors can see their portfolio value and profits in 120+ fiat currencies or in BTC. Support for ETH and other currencies are coming soon.
· We calculate transaction costs in multiple currencies at the time of the transaction, which helps with more accurate profit calculations afterward.
· We allow investors to track their fees for any type of transactions, including buys, sells, deposits, withdrawals, and transfer between exchanges.
Crypto markets are still evolving, and it will be some time before they reach the level of traditional markets in terms of reporting. Yet at Cryptorai, our aim is to give investors real-time visibility in their portfolio, profits, and help them make better decisions.
PS: This is not a financial advice. Cryptocurrency investment are high risk investments. Please consult a financial/tax advisor before making any decisions.
Download Cryptorai from iTunes
Download Cryptorai from Google Play
Visit us at www.cryptorai.com.
