• Profit and Loss (PnL) in cryptocurrency trading is the financial gain or loss from buying and selling cryptocurrencies.
• Key terms that are important to understand PnL include Mark-to-Market (MTM), realized PnL, unrealized PnL, future value and present value.
• To calculate PnL, use various methods like the FIFO, LIFO, YTD, etc.
What is Profit and Loss (PnL) in Cryptocurrency Trading?
Profit and Loss (PnL) refers to the financial gain or loss from buying and selling cryptocurrencies. It is a metric used to evaluate the financial performance of a trader or investor in the crypto market. To calculate it, use various method like the FIFO, LIFO, YTD, and more!
Key Terms in P&L Terminology
Mark-to-Market (MTM): MTM refers to the process of valuing an asset or financial instrument based on its current market price or fair value.
Realized/Unrealized P&L: Realized profit/loss is when a cryptocurrency has been bought or sold at different prices at different times leading to a gain or loss. Unrealized profit/loss occurs when a position has not yet been closed out but still has experienced changes in its market price since opening.
Future Value & Present Value: Future value indicates the value of a digital coin at a future point in time while present value indicates how much worth an asset will have now given its expected return over time.
How to Calculate Profit & Loss
The general formula for calculating Profit & Loss is as follows:
P&L = Market-To-Market Price Today – Market-To-Market Price Yesterday
For example, suppose the MTM price for Ether (ETH) today is $1,970 while yesterday was $1,950; then your Profit & Loss would be $20 indicating that you have made a profit of $20 on your investment. On the contrary if MTM price was $1 980 yesterday then you would have incurred a loss of $10 on your investment.
Examples Of Calculating Profit & Loss
Let’s take another example; if you stake Tron (TRX) worth $1000 with 4% yearly reward then after one year you will get back $1040 which means that at the time of staking present value will be $1000 while future value will be $1040 indicating that you have made a profit of 4%.
Conclusion
Profit and Loss helps traders gain insight into their trades so they can better understand their portfolio performance over time as well as make better decisions about when to buy or sell certain coins for maximum gains. By understanding key concepts such as MTM pricing , realized/unrealized profits/losses and future values/present values one can easily calculate their profits/losses associated with any cryptocurrency trading activity they engage in