Opportunity cost
What does choosing one use of capital actually give up, and how do you measure it?
In plain words
Opportunity cost is the return you did not earn because your capital sat in one place instead of another. It is measured by comparing what you held with the best realistic alternative over the same period, not by looking at your position alone.
Why it matters
A profitable position can still have been the wrong allocation. Risk takers compare candidates before committing, and after the fact they judge a choice by the gap to the alternative, not just by its own return. Over weeks that gap compounds silently.
In a real week: BTC, week of 20 May 2024
In the week of 20 May 2024, BTC returned 3.37%, closing at 68507.67 after a weekly range of 8.96%, on dollar volume of 15.26bn. ETH moved in the same direction but beat BTC by 21.22 percentage points. Capital held in BTC therefore gave up roughly that 21.22-point gap, even though BTC's own week was positive.
A common mistake
Treating opportunity cost as a realised loss. Nothing was lost in cash terms; the cost is the difference against an alternative that was available but not held.