Join today and have your say! It’s FREE!

Become a member today, It's free!

We will not release or resell your information to third parties without your permission.
Please Try Again
{{ error }}
By providing my email, I consent to receiving investment related electronic messages from Stockhouse.

or

Sign In

Please Try Again
{{ error }}
Password Hint : {{passwordHint}}
Forgot Password?

or

Please Try Again {{ error }}

Send my password

SUCCESS
An email was sent with password retrieval instructions. Please go to the link in the email message to retrieve your password.

Become a member today, It's free!

We will not release or resell your information to third parties without your permission.

Calculate the Trading Strategies' Profitability like a Pro

Julia Beyers, Julia Beyers
0 Comments| September 5, 2019

{{labelSign}}  Favorites
{{errorMessage}}

jb1.jpg

Investors venture into cryptocurrency trading to gain profits. They employ customized trading strategies, portfolio management strategies, and progressive investment decisions throughout their trade. Due to the progressive nature of trading, tracking one’s crypto trading profits and losses is the surest way of determining the success rate of the strategies used.

Tracking one’s profits and losses in traditional financial markets is a simple and straightforward activity. It’s possible thanks to the universal regulations and conventions set up by the regulatory bodies. The case, however, is completely different for cryptocurrency traders for a number of reasons.

Why Is It Difficult to Track Profit and Loss in Cryptocurrency Trade?


?Market Fragmentation


The cryptocurrency market is characterized by diversity. Pro traders tend to differentiate their portfolio by trading over different exchanges and holding different assets in multiple wallets. They, therefore, have to track the progress of their trading strategies on each of the exchanges and wallets and later harmonize their portfolio.

?Discrepancies in Asset Pricing Conventions


Cryptocurrencies’ values keep varying. This creates discrepancies in the asset pricing as some of the traded assets are quoted in Bitcoins, others Ethereum and so on. It makes it difficult in determining the accurate value of one’s profits as there is no unique currency that should be used to value assets, unlike traditional financial markets which rely on fiat currencies.

?Lack of a Standardized Accounting Methodology


Traditional financial trading adopted the International Accounting Standards (IAS) in accounting for its assets and liabilities. These standards are universally recognized due to the centralized nature of those markets. The cryptocurrency trade market, on the other hand, is decentralized. There is no definitive regulatory body to govern the trade and its accounting methodology. This makes it difficult for crypto traders to value their profits and losses.

Despite the difficulty in tracking profits and losses in cryptocurrency trade, we have all the secrets you need to do so accurately. Here are a few pointers you need to calculate your trading strategies’ profitability like a pro.

What Assets Should You Value Your Profits and Losses with?


The mature traditional securities trading uses fiat currencies in valuing their profits and losses. A trader can comfortably use any of the recognized currencies, including the US Dollar, Japanese Yen, British Pound, etc.

They can then exchange this value for the currency they use in their home country. For crypto traders, the absence of standardized accounting practices creates a chain of ripple effects in measuring the performance of their trading.

Traders have the option of using fiat currencies, the quote currencies, or Ether/Bitcoin in measuring their performance. The major issue here is, not all crypto exchanges accept fiat currencies or any alternative stable coins. The decentralization nature of crypto trading subjects different stable coins such as USDT, USDC, DAI, and TUSD to their own individual fluctuations with the US dollar.

Additionally, remember that the value of cryptocurrency coins and that of fiat currencies fluctuate differently. Therefore, the rule of thumb is, it is generally easier to calculate your profits and losses using the collateral currency of the trade.

For instance, a majority of the traders use Bitcoins when measuring their portfolio’s performance as it is the most common entry cryptocurrency coin in most exchanges. Similarly, those whose entry cryptocurrency is Ethereum prefer measuring their profits and losses in that currency.

Approaches to Calculating Profits and Loss in Cryptocurrency Trade


Take the following example:

  • On day one, you purchase 1 Bitcoin for $8,000.
  • A couple of days later, you purchase 1 Bitcoin for $6,000.
  • Later on, you purchase 1 Ethereum for 0.07 BTC.

The market prices traded today (as of 26 August 2019) are:

  • ETH/USD = 935.448.
  • ETH/BTC = 0.0799.
  • BTC/USD = 11,837.5.

How do you calculate the gains and losses for the ETH in USD?

1. The Naïve Calculation


Most naïve traders calculate their gain in BTC:

0.0799 – 0.07 = 0.099BTC

They then convert the gain to USD by multiplying the gain in BTC with today’s value of BTC in USD:

0.099 X 11,837.5 = $117.19

This value is, however, incorrect as the value of BTC changed several times from the day you bought it.

N/B: This approach ignores the cost of BTC.

2. The Accurate Method


Find the average cost of each BTC unit:

$8,000 + $6,000 = $14,000

$14,000 / 2 = $7,000

Once you buy 1 ETH at 0.07 BTC, what you are really paying for is:

0.07 X $7,000 = $490

Considering that ETH/USD is $935.45, the gain will be:

$935.45 - $490 = $445.45

N/B: This approach considers the progressive value of BTC and is more accurate.

Advanced Approaches to Measuring


Take another example:

  • The initial price of 1 ETH = 0.02 BTC.
  • A few trades later, the exchange rate increases to 1 ETH = 0.025 BTC.
  • At the end of a trade, you have 60 ETH and 0.7 BTC.

How much profit/loss did you make?

1. The Dynamic Approach


This approach measures the change in portfolio value by calculating the value at the start point of the trade and the value at the end of the trade. Therefore:

To find the starting value of the portfolio:

(50 ETH X 0.02) + 1.0 = 2.0 BTC

The value at the end of the trade will be:

(60 ETH X 0.025) + 0.7 = 2.2 BTC

When you look at it, the portfolio is worth more. Professional traders, however, are more concerned with whether the trade was actually profitable. Hadn’t the trader made those trades, the portfolio’s worth would be:

(50 ETH X 0.025) + 1.0 = 2.25 BTC

There exist a 0.05 BTC difference, which is less than the worth of the portfolio.

N/B: The dynamic approach shows that fluctuations in the exchange rates distort what many perceive as the success of their trading strategies.

2. The Fixed Alternative


This approach uses the exchange rate at the time trading has started to compute the starting and current portfolio values.

Using the same example, the worth at the start of the portfolio would be:

(50ETH X 0.02) + 1.0 BTC = 2.0 BTC

The worth of the current portfolio would be:

(60 ETH X 0.02) + 0.7 BTC = 1.9 BTC

N/B: The fixed alternative approach is more direct, but it does not help in determining if the trade was successful in relation to the fluctuations of the exchange rates of the market.

3. The Harmonized Approach


The last concept combines the best parts of both the dynamic and fixed alternative approach creating a better and more reliable approach; the harmonized one.

Here, we use the current exchange rate to calculate the implied value of the starting portfolio and the actual value of the current exchange.

The value of the starting portfolio would be:

(50 ETH X 0.025) + 1.0 BTC = 2.25 BTC

The value of the current portfolio would be:

(60 ETH X 0.025) + 0.7 BTC = 2.2 BTC

To calculate the actual profitability, the harmonized approach simply divides the value of the current portfolio and the starting portfolio. The result is the percentage of the profits or loss realized:

(2.2 BTC / 2.25 BTC) = 0.98%

Automate Your Trading Strategy Calculations


Calculating the profitability of your trading strategy manually is a tedious process. However, with platforms such as Superorder, you can have your trading strategies accurately tested through automated profitability computation. Moreover, understanding the aforementioned trading strategies calculations is a good way to start your journey of profitable crypto trading!


{{labelSign}}  Favorites
{{errorMessage}}

Comments

No comments yet. Be first to comment!

Leave a Comment

You must be logged in to be able to post a comment.