Many people start their journey with cryptocurrencies without understanding what it really means for their wallet. If you've ever traded on traditional markets, you're probably familiar with the concept of PnL. But what is PnL in the crypto world? It’s not exactly the same, and understanding the differences can change the way you approach investing.

It all began for me out of frustration. I didn’t know if I was making money or losing money because I didn’t have a clear picture of my positions. It turned out that the problem wasn’t in the math itself, but in the fact that no one explained to me how PnL exactly works in cryptocurrency. Today, I want to change that for someone else.

Before we go further, you need to know a few key terms. Mark-to-Market (MTM) is the valuation of your asset based on the current market price. If you own Bitcoin, its value changes every second. That’s MTM. Besides that, we have realized PnL — the profit or loss you’ve already closed by selling assets. And unrealized PnL — the money you theoretically have but haven’t withdrawn yet.

Let’s take a specific example. You’ve probably seen Ethereum fluctuate between $1950 and $1970. If you bought ETH yesterday at $1950, and today the price is $1970, your unrealized PnL is a $20 profit. But if yesterday the price was $1980, you have a $10 loss. That’s what MTM shows — where you are now, not where you were.

Realized PnL is something different. It only works once you sell. Imagine you bought Polkadot at $70 and sold it at $105. Your realized PnL is a $35 profit. But if you closed the position at $55, you have a $15 loss. Only actual transactions count.

Unrealized PnL is what you see on the screen but don’t actually have yet. Suppose you bought Ethereum at an average price of $1900, and now the price is $1600. You’ve theoretically lost $300, but until you sell, this loss isn’t real. That’s unrealized PnL.

Regarding calculations, there are several methods. FIFO — First In, First Out — assumes you sell the oldest assets first. If you bought Ethereum at $1100 and later at $800, and sell at $1200, you consider the $1100 purchase price. The profit is $100. LIFO — Last In, First Out — does the opposite — it takes the most recent purchase price, $800, so the profit is $400. There are also more advanced methods, like the weighted average cost.

One more thing worth knowing is calculating PnL from the beginning of the year. If you bought Cardano for $1000 on January 1, 2022, and on January 1, 2023, it was worth $1600, you have an unrealized profit of $600. It shows how you’ve performed over the years.

Perpetual contracts are a different league. Here, you calculate both realized and unrealized PnL, then add them together. You also need to account for funding fees, which can eat into your profits significantly.

The key to success is understanding where you’re making money and where you’re losing. When you know exactly which transactions earned you profit and which caused losses, you can adjust your strategy. Many people use spreadsheets or trading bots to track this automatically. This is especially useful as the number of transactions grows. However, remember that these are simplified explanations — in practice, you need to consider taxes, transaction fees, and market volatility. But once you understand the basics of what PnL means, everything else becomes much easier.