Maximise Your Profits by Understanding Crypto PnL Calculation
What is Profit and Loss (PnL)?
Profit and loss (PnL) is a term used in traditional finance to evaluate the financial performance of a trader or investor. In cryptocurrency trading, it is a metric used to measure the gain or loss from buying and selling cryptocurrencies. To calculate it, traders use methods like FIFO, LIFO and YTD.
Key Terms in PnL Terminology
Mark-to-market (MTM) – This refers to the process of valuing an asset or financial instrument based on its current market price or fair value.
Future Value – Future value indicates the value of a digital coin at a future point in time. For example, if an investor stakes Tron worth $1,000 with a 4% yearly reward, after one year they will get back $1,040.
The general formula for calculating PnL is: MTM Price today minus MTM Price yesterday = PnL. Suppose the MTM price for Ether today is $1,970 while the MTM price yesterday was $1,950; in this case the PnL would be +$20 indicating a profit of $20. On the contrary if the MTM price was $1,980 yesterday there would be a loss of -$10.
Realized vs Unrealized Profit/Loss
Realized profit/loss refers to any gains or losses incurred when you sell your holdings and close out your position in the market. Unrealized profit/loss reflects gains or losses that have occurred but are not realized until you sell your holdings i.e., they remain “unrealized” unless you execute a trade to realize them as gains/losses on paper only at this point in time.
Profit and loss (PnL) helps traders understand their performance in cryptocurrency trading better by tracking their results over different periods of time through metrics like mark-to-market (MTM), realized PnLs and unrealized PnLs among others. Understanding these terms can provide insight into how successful their trades are overall helping them make more informed decisions going forward.