From profit promises to trading realities: deciphering ROE and ROI in cryptocurrencies

The Trader’s Dilemma: How to Know if Your Investment Is Truly Working

When we operate in the cryptocurrency market, a fundamental question arises: Are my profits truly optimized? This concern is not new. Stock analysts have been using indicators for decades to measure how efficiently companies generate profits. Now, these same principles apply to the crypto ecosystem, but with important nuances.

Understanding Financial Profitability: Beyond Numbers

Financial profitability is the soul of any investment decision. It is the ratio between the net income a business produces and the capital its owners have invested in it. For publicly traded companies, this parameter reveals whether management is efficiently using shareholders’ resources.

Why does this matter in cryptocurrencies? Because the principle is identical: we want to know how much profit we generate for each unit of capital we risk.

The ROE Formula and How It Is Built

The calculation is straightforward: divide the annual net profit by shareholders’ equity, then multiply by 100 to express it as a percentage. This gives you the return on equity.

Key components:

• Net profit: what remains after deducting all expenses (reflected in the income statement)
• Shareholders’ equity: the residual value after paying all debts (balance sheet information)

Practical Calculation Example

Suppose a company reports net earnings of USD 18,500 million and shareholders’ equity of USD 124,000 million. The operation would be: 18,500 ÷ 124,000 = 0.149 × 100 = 14.9%. This percentage indicates that each dollar invested generates 14.9 cents of profit.

Sector Comparison: ROE as a Competitive Tool

A high ROE alone doesn’t say much. The value comes when it is compared with industry averages. Leading companies like Alphabet Inc. showed an ROE of 26.41% at the end of 2022, while Amazon operated at 8.37% in the same period.

What does this gap mean? Not that Alphabet is automatically a better investment. It means that its profit margins on capital are higher within its specific tech sector.

In the S&P 500, the weighted average ROE of the top 10 companies by market capitalization hovered around 18.6% in 2017, providing a benchmark for institutional investors.

Hidden Traps in High ROE

An excessively high return on capital can be an indicator of problems:

Negative equity disguised: If both income and equity are negative, the ratio may seem attractive but be misleading. Analysts should verify that both components are positive.

Excessive leverage: Companies can artificially inflate their ROE by taking massive loans. This works as long as returns exceed debt costs, but it’s the “double-edged sword”: when returns fall, losses are amplified.

Share buybacks: By reducing shareholders’ equity through buybacks, the denominator decreases, artificially inflating the ratio even without real profit improvements.

One-off events: A significant asset sale or accounting depreciation can distort net income for a single period, creating optical illusions of profitability.

Profitability in Crypto Assets: Adapting the Principles

In the crypto universe, we operate with a similar but different concept: return on investment (ROI). If you buy Bitcoin at USD 5,000 and sell it at USD 20,000, your ROI is 3.0 (or 300%). It seems simple, but reality is more complex.

Factors ROI Does Not Capture

• Holding period: ROI does not distinguish between gains in one week versus a year
• Operational costs: commissions, network fees, slippage, taxes
• Volatility: the risk taken to achieve that return

A positive ROI generally correlates with rising assets (Bitcoin, Ethereum, altcoins with upward trends), while a negative ROI indicates depreciation.

Portfolio Optimization in Crypto Through Profitability

Knowing your crypto ROI allows you to answer a key question: Does this asset deserve to stay in my portfolio?

If a cryptocurrency investment does not generate the expected returns, ROI analysis facilitates decisions: sell and rebalance toward better-performing assets, or adjust your strategy.

But there’s more. Understanding how much cash your portfolio generates is essential for:

• Identifying available capital: a positive cash flow allows reinvestment and scaling operations
• Calculating new opportunities: with visibility on gains, plan better when to enter new positions
• Assessing consistency: monthly profitability in cryptos shown through ROI helps see if your strategy is reproducible

The Complementary Metric: When ROE/ROI Is Not Enough

Neither ROE in stocks nor ROI in cryptos should be used as the sole metric. A prudent analyst examines:

• Income history over multiple years (not just an exceptional quarter)
• Sector comparisons (how does it compare to competitors?)
• Trends (is the indicator improving or deteriorating?)
• External factors (regulation, adoption, market cycles)

For stock investors, additional metrics like ROIC (return on invested capital) broaden the perspective. For crypto traders, on-chain analysis and technical momentum complement ROI calculations.

Summary: Profitability as a Compass, Not a Destination

Both financial profitability (ROE) in stocks and returns (ROI) in cryptocurrencies are navigation tools. A solid ROE in companies indicates efficient capital management. A positive ROI in digital assets confirms that the speculation was successful.

But both require context: sector comparison, historical analysis, understanding underlying risks, and evaluating factors that simple calculations do not reflect.

For traders operating Bitcoin, Ethereum, and altcoins, understanding how profitability is calculated and interpreted is the difference between informed decisions and blind bets. The ROE formula, although originating in corporate finance, teaches a universal principle: always measure how much profit you generate for each unit of capital at risk.