This cryptocurrency accounting guide will take you through a commonly asked question of “How Do I Calculate My Crypto Gains?”
The increased interest and excitement towards cryptocurrencies has resulted in an influx of new money flowing into the cryptocurrency market. However, entering the crypto world is extremely intimidating, especially when you’re dealing with a subject matter that is technically complex. With many making a considerable rate of return on their investments, it is vital to understand how we should value our crypto gains (or losses). (See more: 4 Reasons Why Now is the Best Time for You to Invest in Cryptocurrencies)
How Do I Calculate My Crypto Gains?
There are generally 2 ways that you can calculate your crypto gains:
This method entails valuing your gains or losses using your local currency, with the most common fiat currency being used are United States Dollars (USD), South Korea Won (KRW), Great Britain Pounds (GBP), Euro (EUR) and Japanese Yen (JPY).
This is the easiest way to calculate your gains as you will be aware of the value of coins you’re buying with your domestic currency. For example, if the current price of Bitcoin is USD $10,000 and you’re planning to buy USD $1,000 worth of Bitcoin, you’d get 0.10 BTC for your USD $1,000. If the price of a Bitcoin goes up 50% to USD $30,000 each, then your BTC has also increased by 50%, thereby valuing your 0.05 BTC at a great USD $1,500. You would get a profit of USD $500 if you sold all your BTC and cashed-out your investment. (See also: Bitcoin vs Alt Coins Returns: Comparison of Gains Between Bitcoin & Altcoins Investing)
There are over 1,500 coins and tokens available in the cryptocurrency market, and a majority of them cannot be acquired using USD or any fiat currencies. The only way to acquire the majority of these coins is through buying Bitcoin (BTC) first and then converting your BTC to any of these alternative coins (altcoins). Hence, Bitcoin is the base currency for all cryptocurrencies and the gateway to the crypto world. (See more: Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works)
Altcoins refers to all coins and tokens besides Bitcoin; they are alternatives to Bitcoin and are therefore called “altcoins”. Here's a guide to help you understand the differences between coins, tokens and altcoin.
Measuring your gains or losses in BTC value is, therefore, the most accurate way of valuing your investments. This method of calculating your trades takes into account the opportunity cost of holding on to Bitcoin as opposed to using your BTC to purchase other altcoins.
Opportunity cost refers to the potential gain that one could have received but gave up in the pursuit of another course of action. An example is when you use a base currency of BTC/ETH to purchase an altcoin; the opportunity cost is that you may lose the potential gains of holding BTC/ETH if they rose in value relative to your altcoin. In this example, you’d be better off holding your investments in BTC/ETH rather than the altcoin.
Your main purpose of investing in altcoins is to ensure that it generates a better return than Bitcoin, and your actual gains and losses must be measured against BTC as every coin is traded against it. The unit of measurement of BTC is ‘Satoshi’, which was named in honour of the founder of Bitcoin, Satoshi Nakamoto. A satoshi represents the smallest unit of a Bitcoin and there are 100,000,000 satoshis per one bitcoin.
Assume that you have bought a coin that is worth $0.20 each, and it doubled in value to $0.40. You would feel ecstatic to have doubled your initial investment, or a return of a 100%. However, if Bitcoin tripled in price and you initially used BTC to buy your altcoin, then theoretically you have just lost in satoshi (or Bitcoin) value as you would have been better off just holding on to your BTC instead of buying the altcoin. (Read more: Is it Too Late to Buy Bitcoin and Is It too Late to Invest in Cryptocurrency?)
Converting Your Crypto Gains from Satoshi to USD
It is honestly a hassle to calculate your gains in satoshi as the volatility of Bitcoin makes it hard for you to accurately determine your current value. However, there are some great free tools that you can use to mitigate the complication.
If you're on your way to buying your coins, here's a list of useful guides and resources to get you started:
Trading & Exchange
- Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
- Guide to Bittrex Exchange: How to Trade on Bittrex
- Guide to Binance Exchange: How to Open Binance Account and What You Should Know
- Guide to Etherdelta Exchange: How to Trade on Etherdelta
- Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
- Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
- Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)
You might also be interested in A Guide To Fundamental Analysis For Cryptocurrencies & Beginner’s Guide to ICO Investing: How to Participate in ICOs
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I'm Aziz, a seasoned cryptocurrency trader who's really passionate about 2 things; #1) the awesome-revolutionary blockchain technology underlying crypto and #2) helping make bitcoin great ‘again'!