Knowledge Base Crypto Profit and Loss Explained: How to Calculate PnL Accurately

Profit and loss, commonly referred to as PnL, is a core concept in both traditional and cryptocurrency markets. In crypto trading, PnL helps investors understand how their positions perform over time and whether their strategies are effective.

Without a clear way to track profits and losses, trading decisions can quickly become unstructured. Understanding PnL provides clarity, discipline, and better risk management.

PnL measures the change in value of a crypto position over a specific period. It reflects how much profit or loss an investor has generated based on entry prices, exit prices, and current market values.

PnL can apply to a single trade, an open position, or an entire portfolio, making it a key performance indicator for crypto investors and traders.

Mark-to-market (MTM)

MTM represents the current market value of a crypto asset. As prices fluctuate, MTM updates the value of open positions, showing gains or losses based on real-time market conditions.

Future value

Future value estimates what a crypto asset may be worth at a later date. This concept is often used when evaluating staking rewards, yield strategies, or long-term holding scenarios.

Realized PnL

Realized PnL is calculated when a position is closed. It represents the actual profit or loss based on the difference between the entry price and the exit price.

Unrealized PnL

Unrealized PnL reflects gains or losses on open positions. These values change continuously with market prices and only become realized once the position is closed.

There are multiple ways to calculate PnL in crypto, depending on how assets were acquired and sold.

First-in, first-out (FIFO)

FIFO assumes the earliest purchased assets are sold first. PnL is calculated using the cost of the oldest holdings.

Last-in, first-out (LIFO)

LIFO uses the most recent purchase price when calculating PnL. This can result in different profit or loss figures compared to FIFO.

Weighted average cost (WAC)

WAC calculates the average cost of all holdings and uses that value as the cost basis when assets are sold.

An open position refers to a crypto asset that has been purchased but not yet sold. A closed position occurs when the asset is sold, locking in realized PnL.

Regularly reviewing open and closed positions helps traders stay organized, evaluate performance, and refine their strategies.

Year-to-date (YTD) performance

YTD compares portfolio value from the beginning of the year to the present. It helps long-term investors understand unrealized gains or losses over time.

Transaction-based PnL

This method calculates profit or loss for each individual trade, making it useful when dealing with a small number of transactions.

Percentage profit

Expressing PnL as a percentage of the initial investment provides a clearer view of relative performance.

For derivatives such as perpetual contracts, total PnL includes both realized and unrealized components. These calculations are influenced by factors like margin requirements and funding rates.

Accurate tracking becomes increasingly important as strategies grow more complex.