Recently, I’ve been asked this question multiple times: how can I figure out whether I’m actually making a profit or taking a loss in crypto trading? Honestly, if you don’t have a clear logic to track your gains and losses, trading can get really chaotic.

Let’s start with the basics. In crypto, PnL (profit and loss) is essentially a metric that measures how well your investment is performing. But here’s the key point: unlike traditional finance’s simple buy-and-sell approach, the crypto world has a lot more details you need to understand. For example, mark-to-market (MTM) valuation, realized PnL, and unrealized PnL—if you don’t get these concepts, you simply can’t accurately assess your positions.

First, let me explain the most common concepts. MTM is basically revaluing your assets based on the current market price. For instance, if you hold Bitcoin, its value fluctuates day by day with the market price. Suppose today’s MTM price for Ethereum is $1,970 and yesterday’s was $1,950—then your PnL is a $20 profit. Conversely, if yesterday was $1,980, then you’d be down $10. Pretty straightforward, right?

But that’s just the surface. To truly understand profit and loss, you also need to distinguish between realized and unrealized PnL. Realized PnL only counts once you’ve actually sold the coins. For example, if you buy Polkadot at $70 and sell it at $105, that’s a $35 realized profit. But if you haven’t sold yet and you’re only seeing the price rise to $105, that’s unrealized PnL—same number, but the psychological feeling is completely different.

When you calculate things in practice, there are several methods you can use. First in, first out (FIFO) means calculating based on your earliest purchase price. Suppose Bob first buys 1 Ethereum for $1,100, and a few days later buys another for $800. Then, a year later, he sells 1 Ethereum for $1,200. Under FIFO, the cost basis is $1,100, so the final profit is $100. But if you use last in, first out (LIFO), you use the latest $800 as the cost, and the profit becomes $400. The difference is pretty big.

If your trading is frequent, the weighted average cost method may be more suitable. For example, Alice buys 2 Bitcoins at $1,500 and $2,000, respectively—her average cost is $1,750. Later, she sells at $2,400, and the profit is $650. This method is more practical for people who trade often.

There’s also something many people overlook: year-to-date (YTD) calculations. If you’re a long-term holder, you can directly compare your portfolio value at the beginning and end of the year. For example, if you held $1,000 worth of Cardano at the start of 2022 and it becomes $1,600 by the start of 2023, then that’s a $600 unrealized profit. This approach is especially useful for evaluating long-term performance.

PnL calculation for perpetual contracts is a bit more complex because there’s no fixed settlement time. You need to consider both realized and unrealized PnL together—their sum is your total PnL. And you also have to factor in hidden costs like trading fees and funding rates.

To be honest, knowing how to calculate isn’t enough. What really matters is understanding the key parameters of each trade—your cost basis, quantity, and price. Deeply analyzing these can help you evaluate whether your strategy is effective and how you should adjust it. Accurately tracking PnL will make your next decisions more rational.

There are also many tools out there that can help, such as spreadsheets or automated trading bots. They can automatically analyze performance and find profitable opportunities. But no matter what tools you use, the core still comes down to understanding this logic yourself. Only when you truly understand how to calculate and track PnL can you avoid detours in your trading.