With the growing interest in cryptocurrencies, there has been a steady influx of investors in the digital currency market. Cryptocurrencies, especially Bitcoin provide a lucrative market to trade in if you know exactly how to go about it but if truth be told, the crypto world can be intimidating due to its technological complexity. It is important to understand how you can value your cryptocurrency gains or losses if you hope to track your trades accurately and make a good return on your investment.
Everyone who invests in any type of asset needs to measure his or her investments against a given benchmark. The benchmark is a standard against which you measure the value of your investment in that specific asset class. For those who invest in stocks, the S&P 500 is their benchmark. A benchmark helps you to determine if your investment is profitable or not. It shows you whether or not you are investing efficiently with the best ROI possible.
However, the most common confusion among Bitcoin investors is whether to measure your cryptocurrency investments against fiat currencies such as USD or against the current value of BTC. Which of the two is a more accurate benchmark to measure the profit or loss potential of your trading? The simple answer is that it depends on whether you are buying the cryptocurrencies in fiat money or BTC. To drive this point home, let’s start by looking at each of the two benchmarks.
Fiat Currency Benchmark
In this approach, you’ll basically value your profits or losses based on fiat currencies such as USD, GBP, Euro, JPY, South Korea Won or your local currency. Most traders consider this option as the simplest way to calculate gains because you’ll know the value of each coin you intend to buy in your local currency.
For instance, if Bitcoin is currently selling at $10,000 and your intention is to buy Bitcoin worth $1,000, then you’ll automatically know that your money will get you 0.10 BTC. If Bitcoin price shoots up by 50% to $15,000, your BTC will also have increased to 0.15 BTC valued at $1,500. If you sold all your Bitcoin and cashed out, you would make a profit of $500, at least theoretically speaking.
This option looks simple and straightforward if you are buying Bitcoin in fiat USD or other fiat currency. What if you are buying cryptocurrencies in BTC? Obviously, a fiat currency benchmark would not give you an accurate calculation of the gains or losses your investment has made. That’s where a Satoshi or BTC benchmark comes in to give you an accurate measure of your gains or losses.
Let’s start by pointing out that there are over 1,500 (and counting) coins and tokens in the cryptocurrency market and that most of them cannot be purchased with USD, Euro, GBP, JPY, and other fiat currencies. They can only be acquired by purchasing Bitcoin first then converting the Bitcoin to your desired altcoins.
The most accurate way of calculating the value of your cryptocurrency investments, therefore, is by measuring your gains or losses against the current value of BTC. This approach takes into consideration the opportunity cost of keeping your BTC a bit longer rather than using the BTC to buy other altcoins. Opportunity cost, in this case, refers to the gains you’d have made by holding on to your BTC but gave up when you used the BTC to buy another digital asset.
Let’s consider, for example, if you bought a digital asset worth $0.50 per piece and after a short while the altcoin doubled its value to $0.10, you’d definitely be excited by the fact that your investment has doubled giving you a 100% return. However, if you initially used BTC to buy the altcoin and BTC tripled in value at the same time, then you will have lost in Satoshi or Bitcoin value. You would have fared better if you’d held on to the BTC instead of buying the altcoin. Remember the goal of investing in altcoins using BTC is to get a better return than the current value of Bitcoin. This is why you should measure your gains or losses against Bitcoin.
Where Does Satoshi Enter the Equation?
To get the most accurate results, you need to understand a little bit about Satoshi. BTC is measured in smaller units known as Satoshi or sats. The name was given in honor of Satoshi Nakamoto, the founder of Bitcoin. A Satoshi is the smallest divisible value of Bitcoin. One Bitcoin is equal to 100,000,000 Satoshis. The value of BTC in Satoshi is usually displayed in a majority of transactions, especially when calculating Bitcoin transaction fees, which are measured in sats per byte.
Most investors often face a challenge when converting their cryptocurrency gains from Satoshi to BTC or fiat currency. This is usually quite a hassle given the volatility of Bitcoin. It is often difficult to know the current value of your altcoins in terms of Satoshi or BTC. The good news is that you can use an online tool to convert cryptocurrencies and determine their accurate value against Satoshi, BTC, or fiat currency.
The best benchmark to measure your cryptocurrency investment, especially for altcoins acquired using Bitcoin, is definitely BTC. This approach even tells you whether you’d have made a better profit by holding on to the BTC or by using the Bitcoin to purchase a different altcoin. Using BTC as a benchmark saves you from investing in other cryptocurrencies which would not provide better returns than investing the same amount in Bitcoin. After all, your goal in investing in altcoins using BTC is to get better profit than Bitcoins can provide. That’s why it makes sense use BTC rather than fiat currencies to measure the value of your investment in altcoins initially purchased using Bitcoin.