When we talk about cryptocurrency trading, we always mention profit and loss, as both are possible in the risky process.
However, today we are explaining exactly what is profit and loss in cryptocurrency trading, known as PnL, and how do you calculate it.
What is PnL?
PnL refers to the gain or loss from buying and selling cryptocurrencies. There are various methods you can use to calculate PnL like FIFO, LIFO, YTD and many others.
If you have some experience in trading traditional finances, you are probably aware of profit and loss. Of course, we are talking mainly about cryptocurrencies, but is PnL in the crypto world the same as it is in the traditional finance world?
Firstly, it is important to say that the well-defined process to get insights into loss and profits is important for traders. Profit and Loss reflect the change in the value of the positions of traders over a given period.
The basics of PnL
In crypto, Profit and Loss refers to the calculation of the profit and loss made on a given crypto investment or trading. This metric is used for evaluating the performance of the investor in the cryptocurrency market.
What is MTM?
MTM (market-to-market) refers to valuing an asset, based on its current market price. In the context of cryptocurrency trading, when an investor holds a given amount of Bitcoin, for example, its value will fluctuate based on the current market price.
Further value
Further value is an indicator for the value of a digital coin at a future point in time. When the trader stakes, there will be a present price, but when the person considers the future as a whole, there can be countless future values.
Realized PnL
Realized PnL is calculated when traders have sold their cryptocurrencies. What is taken into account here is the executed price of the orders, and it has no relation to the mark price.
The mark price is the price at which the derivatives contract is valued based on the current market price of the asset.
Unrealized PnL
It refers to the profit or loss that is being held in open positions, and has not been realized through closing the position.
Most popular PnL methods
As we already said, there are different PnL methods. Here are some of them:
FIFO or First-ins, First-out method
This PnL method requires the seller to use the asset price from when it was first bought.
LIFO or Last-in, First-out method
This method requires the seller to use the most recent purchase price of the asset in the calculation. The order aspects are just like the FIFO method.
Weighted average cost method
The weighted average cost method required traders to determine the average cost of the units of a digital currency in their portfolio to arrive at the initial cost.
Of course, those are only the basics of Profit and Loss in cryptocurrency trading. Understanding crypto PnL helps investors know if their crypto portfolio is in profit or in loss. Gaining insights into key parameters like cost basis, quantity, and price of each trade will help traders assess the efficiency of their strategies and make the necessary adjustments.
It is important to mention, that apart from PnL calculations, there are many tools like spreadsheets and automated trading bots, useful for traders to analyze their performance and zero in on profitable trading opportunities.
Cryptoarbi is an automated crypto arbitrage platform. All you need to do is choose the right subscription plan, and we will do the work for you.