What Is Profit and Loss (PnL) and How to Calculate It

Trading crypto or traditional finance? You need to understand PnL. It’s that simple. This concept helps traders see how they’re doing and make better choices about their crypto.

Without tracking PnL, crypto trading gets messy fast. You’ll struggle to know what’s working. PnL shows how your positions change over time.

PnL basics

In the crypto world, PnL means calculating what you’ve made or lost on investments. It’s crucial for seeing how you’re performing.

Some key terms to know:

Mark-to-Market (MTM)

MTM values assets at current market prices. Got Bitcoin? Its value changes constantly.

The formula is pretty straightforward: PnL = Current Market Price - Previous Market Price

If ETH costs $3,450 today but was $3,400 yesterday, you’re up $50. Nice! But if yesterday it was $3,500, you’re down $50. Not so nice.

Future Value

This is what your crypto might be worth later. Kind of speculative.

Stake $1,000 with 5% annual reward, and you’d expect $1,050 after a year. Present value: $1,000. Future value: $1,050.

There’s this discount factor thing: Discount Factor = Present Value / Future Value

Realized PnL

You calculate this after selling. It’s real money in or out of your pocket.

Formula: Realized PnL = Exit Price - Entry Price

Buy DOT at $6, sell at $8.50? You made $2.50 profit. Sell at $5? You lost a dollar.

Unrealized PnL

This is profit or loss on stuff you still hold. Paper gains or losses, basically.

Formula: Unrealized PnL = Current Market Price - Average Entry Price

Bought ETH at $3,200 average? Current price $3,450? Your unrealized PnL is $250.

Calculating PnL

Find the difference between what you paid and what it’s worth now. Several ways to do this:

FIFO Method

Uses prices in order of purchase:

1. Calculate initial cost
2. Determine current market value
3. Find the difference

Bob bought 1 ETH at $2,800, then another at $3,000. Sold 1 at $3,450. Initial cost = $2,800 Market value = $3,450 PnL = $650 profit

LIFO Method

Uses most recent purchase price first.

Same example with LIFO: Initial cost = $3,000 Market value = $3,450 PnL = $450 profit

Weighted Average Cost Method

Averages all purchase costs.

Alice bought 1 BTC at $50,000 and 1 BTC at $60,000. Sold 1 at $62,000. Total cost = $110,000 Average = $55,000 Market value = $62,000 PnL = $7,000 profit

Opening and Closing Positions

Buy crypto, open position. Sell crypto, close position.

Buy 10 DOT at $6, sell at $8.50? You made $25 profit.

YTD Calculation

Measures performance since January 1st. Portfolio worth $10,000 on January 1, now worth $13,500? YTD profit is $3,500.

Transaction-Based Calculation

Calculates PnL for each transaction. Buy 1 ETH for $3,000, sell for $3,450? Transaction PnL is $450.

Percentage Profit

Expresses PnL as percentage of initial cost.

Buy BNB at $240, sell at $300: PnL = $60 profit Percentage profit = 25%

These examples ignore fees and taxes though. It seems those always eat into real profits.

Perpetual Contracts PnL

These contracts never expire. Weird but useful.

Calculate PnL by:

1. Add up realized PnL from closed positions
2. Add up unrealized PnL from open positions
3. Total them up

Real world is messier with fees and funding rates.

PnL tools

Understanding PnL helps you see if you’re actually making money. Not entirely clear why so many traders skip this step.

Beyond manual math, there are spreadsheets and automatic tools. They analyze performance and spot opportunities. Good for everyone, regardless of experience.