“Absolute return” refers to the actual profit or loss realized from holding a cryptocurrency or engaging in a specific crypto trading strategy. It measures the real gains or losses made without comparing them to any benchmark or external factors.
How Absolute Return Works
Independent Performance: Absolute return assesses the performance of a cryptocurrency investment or trading strategy on its own merits. It focuses solely on the actual profit or loss generated without considering how the cryptocurrency performed in relation to other cryptocurrencies or the broader crypto market.
Risk Management: Absolute return is often used in crypto hedge funds and investment strategies where the goal is to achieve positive returns regardless of the overall market conditions. It allows investors to evaluate how well a cryptocurrency investment is performing without being influenced by the volatility and fluctuations in the crypto market.
Example: Suppose you invest $1,000 in a specific cryptocurrency, and after a certain period, your investment is worth $1,200. Your absolute return, in this case, is $200, indicating that you’ve made a $200 profit. This measurement does not take into account how other cryptocurrencies or assets have performed during the same time.
Investment Focus: Absolute return is valuable for crypto investors who prioritize the performance of individual cryptocurrencies within their portfolio or a specific trading strategy rather than how those investments compare to a benchmark index or other assets.
Lower Correlation: Investments with a focus on absolute return often aim to have a lower correlation with traditional asset classes like stocks and bonds. This is because they strive to generate positive returns even when traditional markets are performing poorly.
Risk-Adjusted Returns: While absolute return is important, investors should also consider risk-adjusted returns in the crypto space. This involves assessing the returns relative to the level of risk taken to achieve those returns, which is especially crucial given the high volatility of the cryptocurrency market.
How to Calculate Absolute Return?
To calculate the absolute return on an investment, follow these steps:
Determine the Initial Investment (Initial Value): This is the amount of money you initially invested or the initial value of the asset you purchased.
Determine the Final Value: This is the current value of your investment or asset after a specific period. If you’re measuring the return over time, you can use the current market price or value.
Calculate the Absolute Return: The formula for calculating the absolute return is:
Absolute Return = Final Value – Initial Value
Interpret the Result: The calculated absolute return will be a positive number if your investment has gained value, indicating a profit. It will be a negative number if your investment has lost value, indicating a loss.
Express as a Percentage (Optional): You can also express the absolute return as a percentage of the initial investment by using the following formula:
Absolute Return Percentage = (Absolute Return / Initial Value) * 100
This percentage represents the return on your investment relative to your initial investment. If the result is positive, it’s a positive return percentage, indicating a profit. If it’s negative, it’s a negative return percentage, indicating a loss.
Here’s an example:
Suppose you invested $5,000 in a cryptocurrency, and after one year, the investment is now worth $6,200. To calculate the absolute return:
Initial Value = $5,000
Final Value = $6,200
Absolute Return = $6,200 – $5,000 = $1,200
You made an absolute return of $1,200 on your $5,000 investment.
If you want to express this as a percentage:
Absolute Return Percentage = ($1,200 / $5,000) * 100 = 24%
So, in this example, your absolute return is $1,200, and your absolute return percentage is 24%, indicating a 24% profit on your initial investment.
Basically, absolute return in cryptocurrency investments measures the actual profit or loss from holding a specific cryptocurrency or engaging in a crypto trading strategy, independently of external factors. It is a useful metric for evaluating the performance of individual crypto assets within a portfolio or assessing the success of crypto trading strategies.