How to Measure Your Crypto Trading Performance: A Quick Guide

In today’s world, Equity and Forex are not the only extensively traded markets. The rise in the popularity of Bitcoin and Blockchain has led the mainstream to explore the crypto trading space. And this market has indeed come out as a winner – speaking based on the growth in crypto trading volume.

What is Crypto Trading?

As the name clearly suggests, crypto trading is the buying and selling of crypto assets. It involves price predictions, where traders anticipate and position themselves in an upcoming move. Typically, in crypto trading, traders open and close positions on the same, which is termed as day trading.

Like the Foreign Exchange (Currency) market, cryptos are traded in pairs, not individually. For instance, when they say that Bitcoin is currently worth $47,000, they are essentially referring to the cryptocurrency pair BTC/USD. Note that the quote currency (right) can also be a cryptocurrency (example: ETH/BTC).

Getting started with trading cryptos is simple. All you need to do is get a crypto wallet and register with any cryptocurrency exchange (aka broker in the forex market). Once registered successfully, fund your account to begin trading.

Cryptocurrency Trading Performance

Cryptocurrency trading is no different from trading other asset classes. The logic, technicals, goals, etc., are the same. Cryptos are traded with an intention to generate profits off it. Thus, the concepts and techniques used in traditional markets, do hold true in the crypto market as well.

As you gain experience trading cryptos, it is crucial to understand your performance. Tracking your gains and losses become extremely critical in assessing the efficiency of your trading strategy, risk and money management, investment decisions.

Most traders evaluate their performance by simply calculating the percentage gain/loss for a particular period. A positive return would indicate good performance, while negative percentage returns would indicate poor performance. The approach sounds logical, but it is ineffective to really grow an account and improve on the strategy. The typical approach could help in linear growth but would likely fail to take it exponentially. Thus, it is necessary to employ other powerful metrics to measure one’s trading performance, especially in the crypto market.

Tracking crypto trading performance might seem like an easy task but is often quite tricky and complex. And the reason for its complexity comes from the following challenges:

1. Majority of the crypto traders have various cryptos in multiple exchanges.
2. Involves different types of convention in asset pricing. Crypto pairs quoted against another crypto instead of fiat currencies.
3. Unlike the traditional markets, the accounting methods are non-standardized.

Risk Analysis – An Underestimated Powerful Tool

Before diving into the key metrics for cryptocurrency trading, let us get the fundamentals cemented. A successful trader not only possesses an effective trading technical strategy but the skill of risk mitigation too.

Risk – The possibility for the markets to move in the opposite direction, due to market volatility.

To maintain consistency in trading, it is necessary for traders to consider the risk apart from positive returns in analyzing the key performance indicators. Using risk-adjusted returns is easy-going in the traditional markets but gets rather tricky in the crypto market.

Key Performance Metrics for Cryptocurrency Trading

As mentioned earlier, the goals in both markets – Crypto and traditional – are the same, but when we turn completely towards the performance measures, factors may vary.

For instance, massive movements overnight are a thing in the crypto market. They are known for high volatility and significantly lesser liquidity than the equities and forex. Hence, application of key performance metrics for cryptocurrency trading could, to an extent, obstruct the overall analysis of cryptos. Having that said, the widely used technical analysis would compensate for the hindrance. This is because the crypto price movement is typically biased on the price action over fundamental factors.

Are the profits synonymous to both asset classes? No. The success measure is going to remain the same, while the measurement of profit would change.

Performance Measurement in Crypto Trading

The cryptocurrency market is considered to be the most volatile market. And finding a profitable strategy in this unpredictable market is quite a challenging task. A profitable strategy cannot be decided in theory by adding up the winning trades. There are systematic analysis methods to measure the results. Following is a brief description of the process to go about it:

The initial step is to decide upon the currency you wish to calculate your results in. Unlike the forex market, it need not be a fiat currency (like USD, EUR, GBP, etc.). Next, the measured performance will be used to compare it against a preset benchmark. Another piece to consider is the missed opportunities – to determine whether you could have yielded more profits if the money were invested or if simply held in the account.

Now, with an understanding of the flow for measuring crypto performance, let us dive deep into each step of the process.

1. Selecting a crypto asset class

Picking a currency to settle your traded assets might seem like a minute job but is quite complex in the crypto space. As mentioned earlier, the results obtained in a crypto account are not typically measured in fiat currencies like in the traditional market. This is because both the base currency and quote currency are quoted as crypto. Back in the day, people simply bought and sold BTC/USD. But as crypto exchange emerged and traders began to rigorously trade the cryptos on a daily basis, the crypto pairs (having both base and quote as cryptos) became popular. And the main reason for its usage was directly related to the high fees levied in squaring off a position in a fiat currency.

Did crypto pairs with quote currency as crypto solve the issue of high fees? Yes. However, trading these pairs is associated with a disadvantage. Both currencies being crypto, the volatility in the market increases accordingly, adding additional risk on traders. To fix this issue, traders went on to choose stable coins like USDT, to get rid of the high volatility in the crypto market.

The introduction of stable coins was indeed a success as it solved the problem of both high fees and high volatility, but these coins are said to be exposed to the risk of market manipulation.

Furthermore, the usage of USDT as a currency for settlement overcomplicated the result measuring process. For instance, let’s say you have chosen USDT as your currency to measure results. You closed a position trading a crypto asset for Bitcoin. Besides, the value of that crypto asset has increased, while it has decreased against Bitcoin. Since you traded BTC against that crypto asset and the value of it has decreased, you would have technically made a loss. But the settlement being in USDT, the loss incurred would be confounded because the value of the asset has increased against USDT.

In the majority, there are another set of traders, who keep their result measuring currency to BTC. With its market cap being humongous and fundamentals strong, they trust and rely on it. They, in fact, see it as a win-win because they believe that the value of Bitcoin is going to be stable and increases, at least in the long term. If looked closely, this approach adds a flavour of investing as well.

2. Comparing with benchmark

The next step in performance measurement is the benchmark comparison. Typically, there are three types of traders. The first type of traders is the ones whose only goal is to end up green on their account in a specified period. The second type is those that fix on a specific percentage gain on their account balance for a given period. The majority fall in this category. Now the third type is traders who measure their returns against some benchmark return. And the third type is the one we would highly recommend.

How to Compare Returns against a Benchmark?

Measuring the generated profits in a period against a benchmark is popular in the traditional market. And the same can be applied in the cryptocurrency market as well. Alpha is a performance indicator widely used across various markets to measure the return of an asset against a chosen benchmark.

The commonly used benchmark in the crypto market is the Total Market Capitalization (TMC). Additionally, traders also consider indices recommended by big funds and analytical groups that give a clear picture of the overall direction of the market.

Benchmark Comparison Example

Therefore, a positive alpha value indicates that the trader’s portfolio outperformed the total market cap by 6%.

3. Missed out Trades

Let’s say you did end up performing better than the benchmark. But to leverage your performance, it is vital to find out the opportunities that you missed. Doing so would help you determine if your capital would have grown larger when invested or let go (simply held in the wallet). Besides, it would also help you position yourself better in the market next time around.

Example

Let’s say you have some XRP in your account.

Based on your analysis, you are anticipating the Bitcoin prices to shoot. Thus, you buy BTC by selling your XRP.

Earlier portfolio: Only XRP, no BTC

Current portfolio: Only BTC, no XRP

After a week or so, the BTC price is up 14% from where you had invested it. While XRP, on the other hand, is up 21%.

Now, your portfolio would have increased by 14%. However, it could have been up by 21% if XRP were held as it is.

Thus, in this case, it would have been better off if the opportunity were missed.

Takeaway

We saw that by investing in Bitcoin, we indirectly made a loss of 7% as holding XRP would yield 21% compared to 14% in BTC.

Henceforth, to leverage your opportunities, you could analyze both the currencies (XRP and BTC, in this example) and figure out which currency will generate better returns relatively.

Alternatively, you could invest 50% in one currency and rest 50% in the other currency to avoid regrets.

Where can I Track my Cryptocurrency Portfolio?

Your crypto assets can be tracked by yourself by maintaining an excel sheet or related document. To make your life simpler, the following are some useful trackers to track your cryptocurrency portfolio.

Final Thoughts

Crypto trading is not only about price predictions and being right. It is a business, which involves strategies, risk and money management, performance tracking, etc. People are educated enough in the trading strategy and risk management domains. But when it comes to an understanding of the key performance metrics for cryptocurrency trading, the application is not spread wide across.

In this article, we understood that crypto performance is not solely related to the portfolio percentage increase. We also interpreted the systematic process to assess the performance of a crypto account and listed out some crypto trackers as well. Side note, the technology has headed so far that there are bots that completely measure the performance of one’s crypto trading account.

The application of the key performance metrics for cryptocurrency trading is popular in the USA and most part of the UK. Yet, the reach is limited in Asian countries. Nonetheless, with more and more countries pulling off restrictions on cryptos, we believe that the newcomers will gradually begin to realize its importance through the internet.