Anyone involved in trading—whether in traditional finance or cryptocurrencies—should understand profit and loss (PnL). While the core concept remains similar, cryptocurrency trading introduces unique terms like mark-to-market (MTM), realized PnL, and unrealized PnL. Grasping these helps traders evaluate their crypto holdings effectively.
Without a structured PnL analysis, crypto trading can feel overwhelming. PnL reflects changes in the value of a trader’s positions over time. Let’s break it down in the context of cryptocurrency.
Key PnL Terminology
Mark-to-Market (MTM)
MTM values an asset based on its current market price. For example, if you hold Bitcoin, its value fluctuates with market prices.
Formula:
[ \text{PnL} = \text{Current MTM Price} - \text{Previous MTM Price} ]
Example:
- Yesterday’s ETH MTM: $1,950
- Today’s ETH MTM: $1,970
- PnL: $20 profit
If ETH’s MTM dropped to $1,600**, the PnL would show a **$350 loss.
Future Value
This estimates a coin’s value at a future date.
Example:
- Stake $1,000 TRX at 4% annual reward.
- Future value after 1 year: $1,040.
Discount Factor Formula:
[ \text{Discount Factor} = \frac{\text{Present Value}}{\text{Future Value}} ]
For the TRX example:
[ \frac{$1,000}{$1,040} = 0.9615 ]
Realized PnL
Calculated after closing a position (selling the crypto). It uses the executed trade price, not the mark price.
Formula:
[ \text{Realized PnL} = \text{Exit Price} - \text{Entry Price} ]
Example:
- Buy DOT at $70**, sell at **$105.
- PnL: $35 profit.
If sold at $55**, the PnL becomes a **$15 loss.
Unrealized PnL
This reflects open positions’ profit/loss before closing.
Formula:
[ \text{Unrealized PnL} = \text{Mark Price} - \text{Entry Price} ]
Example:
- Buy ETH at $1,900**; current mark price: **$1,600.
- Unrealized PnL: $300 loss.
PnL Calculation Methods
1. FIFO (First-In, First-Out)
Uses the oldest purchase price first.
Example:
- Buy 1 ETH at $1,100**, then **1 ETH at $800.
- Sell 1 ETH at $1,200.
- Initial cost: $1,100 (oldest purchase).
- PnL: $100 profit.
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2. LIFO (Last-In, First-Out)
Uses the newest purchase price first.
Same example:
- Initial cost: $800 (most recent purchase).
- PnL: $400 profit.
3. Weighted Average Cost
Averages all purchase prices.
Example:
- Buy 1 BTC at $1,500**, then **1 BTC at $2,000.
- Total cost: $3,500** / **2 BTC = $1,750 per BTC.
- Sell 1 BTC at $2,400.
- PnL: $650 profit.
Advanced PnL Scenarios
Perpetual Contracts
These futures contracts lack expiration dates. Calculate both realized and unrealized PnL, then sum them.
Steps:
- Track all trades (entry/exit prices).
- Adjust for fees and funding rates.
Year-to-Date (YTD) Calculation
Measures performance from January 1 to now.
Example:
- January 1 ADA holding: $1,000.
- Current ADA value: $1,600.
- Unrealized profit: $600.
Tools for PnL Tracking
- Spreadsheets: Manual but customizable.
- Trading bots: Automate calculations.
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FAQs
Q: What’s the difference between realized and unrealized PnL?
A: Realized PnL reflects closed trades; unrealized PnL tracks open positions.
Q: How do fees impact PnL?
A: Trading fees reduce net profit. Always factor them in.
Q: Which PnL method is best for crypto taxes?
A: FIFO is widely accepted, but check local regulations.
Q: Can unrealized PnL become negative?
A: Yes, if the asset’s value drops below your purchase price.
Final Tip: Consistently monitor PnL to refine strategies and maximize returns. Happy trading! 🚀