ROE: The key metric every cryptocurrency trader must understand

Why should Bitcoin and altcoin traders care about traditional financial metrics? The answer is simple: understanding profitability is fundamental, whether you invest in stocks or crypto assets. If you want to assess whether your investments truly generate value, you need to master concepts like return on equity and its respective ROE formula.

Understanding Financial Profitability Beyond Stocks

Before jumping into the crypto world, it’s crucial to understand what lies behind this indicator. Financial profitability is a parameter that reveals how efficiently a company converts shareholders’ money into profits. In simple terms: it shows how much profit a company generates with each unit of invested capital.

The indicator is calculated by dividing net income by shareholders’ equity. A company with high financial profitability uses capital intelligently to generate income, while one with low profitability wastes resources.

The ROE Formula Explained Simply

The ROE formula is straightforward: take the annual net income and divide it by total shareholders’ equity. Multiply the result by 100 to get a percentage.

For example, if a company earned USD 18,500 million in net profits and its equity is USD 124,000 million, the calculation would be:

ROE = (18,500 / 124,000) × 100 = 14.9%

This means the company generated 14.9 cents of profit for every dollar of shareholders’ capital.

When Is a Very High ROE Suspicious?

A high ROE doesn’t always indicate good management. There are common pitfalls:

Excessive leverage: A company can artificially boost its financial profitability by borrowing money (leverage). While it works when income exceeds loan costs, it’s a double-edged sword that amplifies both gains and losses.

Share buybacks: When a company repurchases its own shares, the denominator (equity) decreases, causing ROE to rise without actual improvements in earnings.

One-off events: Major inventory devaluations or unique amortizations can temporarily distort the indicator.

For this reason, analysts shouldn’t rely solely on ROE. Complementing it with other metrics like ROI (return on investment) provides a more complete picture.

Applying ROE to Cryptocurrency Trading

This is where the concept becomes relevant for traders. Although Bitcoin, Ethereum, and altcoins operate differently from traditional stocks, the principle of evaluating profitability is identical.

When trading crypto assets, ROI is your main ally. It’s calculated by subtracting the purchase price from the sale price, and dividing that result by your initial investment.

Practical example: If you bought a crypto asset for USD 5,000 and sold it for USD 20,000:

ROI = (20,000 - 5,000) / 5,000 = 3.0 or 300%

This means you tripled your initial investment. However, ROI alone doesn’t tell the whole story in crypto. You should consider:

• Transaction fees and trading commissions
• Time invested (300% in a year or in a week?)
• Asset’s behavior history
• Past volatility and trends

Measuring Your Monthly Trading Profitability

To optimize your crypto trading portfolio, it’s essential to regularly track your profitability. Some traders calculate their ROI monthly to:

Identify what works: Comparing the performance of different assets helps you know which generate the returns you expect. If an investment doesn’t meet your standards, it’s time to reposition.

Manage cash flow: Knowing how much money your portfolio is generating is crucial to determine when you have capital available for new trades. A positive flow allows reinvestment and accelerates growth.

Spot opportunities: A positive ROI in certain assets frees up capital to diversify into others, improving your overall results.

Positive vs. Negative ROI in Crypto Assets

A positive ROI generally indicates that your asset is moving in the right direction and gaining value. It’s the green light every trader looks for.

A negative ROI, on the other hand, means you’ve lost money. Crypto assets with negative profitability require special attention: evaluate whether you expect a recovery or if it’s better to cut losses before bigger declines.

The Time Factor That ROE and ROI Don’t Consider

A critical difference between investing in stocks and trading cryptocurrencies: time. An investment that doubles in five years performs very differently from one that does so in five days.

When evaluating your crypto profitability, research the asset’s historical behavior, its progress over recent years, and market cycles. This context can’t be provided by any formula.

Conclusion: Use the ROE Formula as a Tool, Not a Rule

The ROE formula is a powerful tool in finance, and understanding it benefits traders in any market. In the world of Bitcoin, Ethereum, and altcoins, knowing how to measure and evaluate financial profitability makes you a more sophisticated operator.

Remember: a high ROE or ROI number isn’t everything. Seek the full picture, question suspicious numbers, and complement your analysis with multiple metrics. Only then can you make informed decisions that truly protect and grow your crypto portfolio.