The Currency Effect: How FX Impacts Your Crypto Returns

When you look at the price of Bitcoin or Ethereum, you're usually seeing a number quoted in US dollars. This is because the global crypto market, for the most part, uses the dollar as its reference point. But if your home currency isn't the dollar – perhaps you hold euros, pounds, or yen – then your actual return from holding that asset is a blend of two forces: the asset's movement in dollars, and the movement of your home currency against the dollar.

This is what we mean by the currency effect on returns. It’s the impact of exchange rate shifts on the value of your investments when translated back into your base currency. For investors outside the US, this effect can be significant, sometimes even masking or amplifying the underlying asset's performance.

Understanding FX Attribution for Investors

Let's imagine you're a euro-denominated investor. You bought Bitcoin when it was priced at $40,000, and you sold it when it was also at $40,000. In dollar terms, your asset has gone nowhere. However, during the time you held Bitcoin, the exchange rate shifted. Suppose that at the time of purchase, $1 was worth €0.90, and at the time of sale, $1 was worth €0.95. Your initial investment of $40,000 then equated to €36,000 ($40,000 x 0.90). When you sold, those same $40,000 were worth €38,000 ($40,000 x 0.95).

Even though Bitcoin's price in dollars didn't change, your euro-denominated return was positive. You started with €36,000 worth of Bitcoin and ended with €38,000 worth. That's a gain of €2,000, or roughly 5.5%, purely from the strengthening of the dollar against the euro. The entire gain in your home currency came from the currency effect, not from Bitcoin's price appreciation in dollars.

Conversely, imagine the dollar weakened against the euro during the same period. If $1 went from €0.90 to €0.85, your initial €36,000 investment would have bought $40,000. When you sold at $40,000, you would have received €34,000 ($40,000 x 0.85). Despite Bitcoin being flat in dollar terms, you would have experienced a loss of €2,000, or about 5.5%, because of the depreciating dollar.

The Illusion of Comparison

This currency effect can lead to misunderstandings, especially when comparing your results with friends or colleagues in different countries. Suppose you and a friend in the US both bought Bitcoin at $40,000 and sold it at $42,000. Your friend, using dollars as their base currency, saw a 5% gain ($2,000 on $40,000). If, during that period, the dollar weakened against your home currency, your return in euros might be lower than your friend's, or even negative, despite the asset performing well in dollar terms.

For example, if Bitcoin rose 5% in dollars (from $40,000 to $42,000) and the dollar also weakened by 3% against the euro (meaning $1 went from €0.90 to €0.873), your initial €36,000 investment would have bought $40,000. When you sold $42,000, you would receive €36,666 ($42,000 x 0.873). That's a gain of €666 on your €36,000 investment, a return of about 1.85%. While positive, it's significantly less than your friend's 5% dollar return. The difference is the impact of the currency movement.

It's equally possible that the dollar strengthened against the euro. If Bitcoin rose 5% in dollars (from $40,000 to $42,000) and the dollar strengthened by 3% against the euro (meaning $1 went from €0.90 to €0.927), your initial €36,000 investment would have bought $40,000. When you sold $42,000, you would receive €38,934 ($42,000 x 0.927). That's a gain of €2,934 on your €36,000 investment, a return of about 8.15%. In this scenario, your euro return is higher than your friend's dollar return, again due to the currency effect.

How to View Your Returns

For investors like you, it's helpful to decompose your total return into its constituent parts: the asset's performance in its primary quoted currency (usually USD) and the currency's performance against your base currency. This FX attribution helps you understand where your gains or losses are truly coming from.

When we present our analysis, we often show performance figures in USD, as that's the market convention. However, for our users, understanding how these movements translate into their home currency is key. Tools that allow you to select your base currency can help illustrate this. For instance, if you're viewing gold and its price in dollars has risen 10%, but the dollar has also weakened by 5% against your home currency, your actual return in your home currency might be closer to 5%. Conversely, if the dollar strengthened by 5%, your return might be closer to 15%.

For any asset, whether it's a cryptocurrency or a traditional instrument like gold, the final value in your account is always influenced by the prevailing exchange rates. Ignoring this can lead to an incomplete picture of your investment performance.

What is a 'dollar-denominated' asset?

A dollar-denominated asset is one whose price is quoted and typically traded in US dollars. Most cryptocurrencies, as well as many global commodities and stocks, fall into this category. When you hold such an asset and your home currency is not the dollar, your return will always be subject to the currency effect.

Does the currency effect apply to stocks too?

Yes, absolutely. If you live in the UK and buy a US stock, its price is quoted in dollars. If that stock rises 10% in dollar terms, your return in pounds will be that 10% gain plus or minus the change in the pound-dollar exchange rate. The currency effect is a fundamental aspect of international investing for any asset class.

Why do crypto prices tend to move together?

While not directly about the currency effect, it's worth noting that crypto assets often show high correlations. This means they tend to move in the same direction at the same time, influenced by broader market sentiment, regulatory news, or macroeconomic factors that affect risk assets. This correlation can amplify gains or losses, independent of the currency impact on your returns.

This information helps you understand your portfolio, but it does not constitute investment advice.