Analyzing the ROI of Long-Term Crypto Investors and Day Traders

ROI Definition

Return on Investment, commonly known as ROI, is a term that describes the profitability ratio of an asset. In the context of cryptocurrencies, ROI compares the purchasing cost of a digital currency with its returns. Users can determine the ROI of their investments once they adopt long/short-term trading strategies. Generally, a lower ROI means that profits are lower than the initial investment, while a higher ROI signifies rewarding the crypto investment.

The ROI of Day Traders

As mentioned above, day trading involves a day-to-day exercise of exchanging digital currencies. Here, investors mainly trade at different intervals. The short-term strategy can be profitable. An in-depth understanding of the market enables users to know when they can enter or exit a trade. Hence, investors may generate an average profit of 5-10% daily, depending on the short-term strategy. It requires constant market research and technical analysis to make the right trades. Such barriers encourage the growth of copy trading, which lets new investors reap profits by leveraging the positions of other experienced traders.

All things considered, copy trading can provide returns ranging from 5% to 50%.  In 2021, eToro investors attained an ROI of 30% from the platform's copy trading option. This performance is indicative of the potential returns one can receive from day trading.

The Profitability of Long-term Investors

Long-term crypto investors perform less actions in the market because they primarily store their digital coins. Under this section, users may buy cryptocurrencies at a lower price and only sell them once their values grow. Price corrections are standard processes that frequently occur in the virtual currency economy. Being volatile assets, crypto investors are shifting their focus on long-term strategies such as hodling to minimize the risks of losses. Thus, long-term tactics can produce a compounded ROI depending on the asset in question.

In January 2022, close to 74% of BTC investors made profits by holding the asset. Investors were receiving massive returns on their investments despite the massive sell-offs taking place at the time. The same data also reveals that 18% of the hodlers were experiencing losses while 7% were on neutral ground. At press time, 56% of investors are currently making profits from holding BTCs, while 40% are in losses.

The ROI of long-term crypto investors also goes hand in hand with the investment period they select. Holding digital currencies for one year may produce smaller returns than a three-year holding plan. The acceptance rate of cryptocurrencies plays a crucial role in determining their future values. A lower acceptance will automatically produce minimal ROI for long-term crypto investors. The reverse is true because crypto projects with significant adoption rates have bigger chances of generating a higher ROI.

How Taxes Impact the ROI of Crypto Investors

The Internal Revenue Authority (IRS) classifies digital currencies as property, making cryptocurrency transactions taxable. However, buying crypto from exchanges and other avenues is not a taxable event. For that reason, long-term crypto investors do not attract any taxes even when the coin's value increases. Long-term investors can only be taxed when they sell their holdings within a year after purchase. Consequently, users who sell their cryptocurrencies after a year are subject to paying long-term capital gains taxes. In most instances, short-term tax rates tend to be higher than long-term taxes. Long-term tax rates might range from 0% to 20%, while short-term taxes apply a minimum and maximum rate of 10% and 37% respectively.

Bottomline

Day traders and long-term investors are making significant moves in the digital asset economy. The investment period is a major factor that separates these two types of traders and how many gains they can gather within those timeframes. In day trading, investors are more active in the market and rely on several conditions to attain profits. On the flip side, long-term investors are less active as they mainly store and anticipate an asset's growth. While both categories may offer lucrative rewards, a trader's risk tolerance is necessary to navigate the volatile crypto market.