In both traditional finance and the crypto market, the term Break Even Point (BEP) is a crucial concept. Let’s explore BEP in Crypto.
What is the Break Even Point?
Break Even Point (BEP) is defined as the point where total revenue equals total costs. At BEP, the investor neither makes a profit nor incurs a loss. In the context of finance and business, BEP helps determine how much revenue or output is needed to break even.
In the crypto market, the Break Even Point is particularly meaningful when applied to some common scenarios:
- Buying and selling crypto: Determining the selling price needed to break even after factoring in transaction fees.
- Staking and Yield Farming: Calculating the time it takes for the returns from staking rewards to cover the initial investment.
- Mining: Calculating BEP based on hardware costs, electricity costs, and other operating expenses.
How to Calculate Break Even Point in Crypto
The basic formula for calculating BEP is:
BEP = (Total Investment Cost + Transaction Fees) / Number of Tokens Owned
Illustrative Example:
- You buy 1 ETH at a price of $1,500.
- The transaction fee to buy ETH is $50.
- Then, your BEP is: BEP = (1,500 + 50) / 1 = $1,550
- If the price of ETH reaches above $1,550, you start to make a profit.
Factors Affecting BEP in Crypto
To calculate the break-even point in crypto, several factors need to be considered:
Token Purchase Price
The initial purchase price is the most basic factor affecting BEP.
- Higher purchase price, higher BEP: If you buy a token at a high price, the BEP will require a higher market price for you to break even.
- Investment strategy:
- Buying at low prices (DCA – Dollar Cost Averaging) will help reduce BEP.
- Avoid buying during “FOMO” or when the market is overheated.
Example:
- You buy 1 ETH at $1,500 → BEP = $1,500 (excluding transaction fees).
- If you buy more when the price drops to $1,300, your BEP will decrease.
Transaction Fees
Transaction fees are a factor that cannot be ignored when calculating BEP in crypto.
- Transaction fees on exchanges: Centralized exchanges (CEXs) such as Binance and Coinbase typically charge 0.1% to 0.3% per transaction.
- Gas fees on the blockchain:
- Ethereum (ETH): Gas fees can be very high during times of network congestion ($20-$200/transaction).
- Binance Chain (BSC): Lower transaction fees ($0.1-$1/transaction).
- Impact: High fees will increase BEP, so users should choose the appropriate time and blockchain to reduce costs.
Market Volatility
The crypto market is known for its high volatility.
- Rapid price increase: When the market rises quickly, BEP is easier to achieve.
- Sharp price decrease: If the token price falls excessively, BEP becomes difficult to achieve and can lead to losses.
Ways to reduce impact:
- Invest in tokens with high intrinsic value and low volatility.
- Avoid investing when the market is in a period of sharp correction or instability.
Token Holding Time
The holding time of a token affects BEP through additional profits from mechanisms such as staking or farming.
- Staking: Receiving rewards from staking tokens can reduce BEP. For example, if you stake 1 ETH and receive a 5% reward after one year, your BEP will decrease due to staking profits.
- Farming: Profits from liquidity farming also help reduce BEP, but it is necessary to consider the risk of “impermanent loss.”
Calculating BEP in Specific Situations
Buying and Selling Crypto Assets
Scenario: An investor buys 10 ETH at $1,800/ETH, with an exchange transaction fee of 0.5%.
Calculate total purchase cost:
- ETH purchase price: 10 × 1,800 = $18,000.
- Transaction fees: (1,800 × 0.5%) × 10 = $90.
- Total cost: 18,000 + 90 = $18,090.
Calculate BEP:
- BEP is the price at which the total selling value of ETH = total initial cost.
- To break even, the selling price of 10 ETH needs to reach a total value of $18,090.
Analysis:
- Required selling price: If the ETH price exceeds $1,809/ETH, the investor starts to make a profit.
- Conclusion: Even small transaction fees (0.5%) significantly impact BEP. For larger investments or blockchains with high transaction fees (such as Ethereum), investors need to be careful in their calculations.
Staking and Yield Farming
An investor stakes 100 tokens of A, priced at $2/token, with a total investment of $200. The project offers a staking reward of 20% APY.
- Annual staking reward: 200 × 20% = $40.
Calculate BEP:
- BEP is reached when the total staking rewards are enough to offset the initial investment.
- After 1 year, the total asset value will be: $200 + $40 = $240.
Analysis:
- Impact of APY: With 20% APY, the investor needs to hold the token for at least 1 year for the BEP to be reduced (due to receiving additional rewards).
- Token price risk: If the price of token A falls below $2, the staking reward may not be enough to offset the loss.
Staking offers long-term benefits, but investors need to monitor the market price of the token to ensure the value of the reward is not diminished by price fluctuations.
Liquidity Provider
When you provide liquidity (Liquidity Provider – LP) for asset pairs on a decentralized exchange (DEX), calculating BEP becomes more complex because it is necessary to consider “impermanent loss” – a loss that occurs when the price of assets in the pool fluctuates compared to the time you provide liquidity. Here’s how to calculate BEP in this case.
Some factors affecting BEP in LP:
- Price of assets in the LP pair: Changes in the price of one or both assets in the pool directly affect the total asset value.
- Yield farming rewards: Some LP pools offer rewards such as project tokens to compensate for impermanent loss.
- Impermanent Loss (IL): Loss due to asset price fluctuations.
- Transaction fees (swap fees): Transaction fees collected from swap activities in the pool help increase profits.
BEP in the case of providing liquidity is calculated as follows:
BEP = Total initial investment + Impermanent loss – Yield farming rewards – Earned transaction fees
- Total initial investment: The value of the assets when you add liquidity to the pool.
- Impermanent loss (IL): The decrease in asset value due to price fluctuations in the pool.
- Yield farming rewards: The value of token rewards received from staking LP tokens.
- Transaction fees: The profit earned from swap fees in the pool.
You provide liquidity to the ETH/USDC pair on Uniswap:
- Initial amount: 1 ETH = 2,000 USDC.
- You provide: 1 ETH + 2,000 USDC (total value is $4,000).
During the liquidity provision period:
- The price of ETH increases to 3,000 USDC.
- Transaction fees earned: $50.
- Yield farming rewards: $100.
- Impermanent Loss (IL): 5.72%.
Value of assets in the pool:
- After the price of ETH increases to 3,000 USDC, the ETH/USDC ratio in the pool changes.
- The value of assets in the pool decreases due to IL: Impermanent Loss = 4,000 × 5.72% = $228.8.
- Value remaining after IL: 4,000 – 228.8 = $3,771.2.
Plus profits from rewards and fees:
- Yield farming rewards: $100.
- Transaction fees: $50.
- Total profit from rewards and fees: 100 + 50 = $150.
Calculate BEP
- Total final value of assets in the pool: 3,771.2 + 150 = $3,921.2.
- BEP has not been reached because the asset value is still lower than the initial capital of $4,000.
In the example above, despite the yield farming rewards and transaction fees, the impermanent loss (IL) still reduces the total asset value.
To reach BEP, you need:
- The price of ETH to continue to rise above the threshold to offset the loss.
- Or higher yield farming rewards and transaction fees.
Calculating BEP in the case of providing liquidity for a volatile asset pair is more complicated due to the need to consider impermanent loss and other factors. Investors need to be cautious with asset price fluctuations and optimize profits from yield farming rewards and transaction fees to reduce BEP and achieve maximum returns.
Read more: How to minimize Impermanent Loss in Crypto
