• Profit and Loss (PnL) is a metric used to evaluate the financial performance of a trader or investor in the cryptocurrency market.
• It is calculated by taking into account the change in the value of a trader’s positions over a specific period.
• To understand PnL, it is important to know terms like mark-to-market (MTM), realized PnL and unrealized PnL.
What is Profit and Loss (P&L)?
Profit and Loss (P&L) refers to the financial gain or loss from buying and selling cryptocurrencies. It is used as a metric to evaluate the financial performance of a trader or investor in the crypto market, based on the change in value of their positions over a certain period. To understand P&L, it is important to comprehend terms like mark-to-market (MTM), realized P&L and unrealized P&L.
Mark-to-Market (MTM)
Mark-to-market (MTM) is a process for valuing an asset or financial instrument based on its current market price or fair value. For example, if an investor holds Bitcoin BTC $29,542 , its MTM price will fluctuate with changes in its current market price. The general formula for calculating P&L based on MTM value is: Current Value – Previous Value = Profit/ Loss.
Realized & Unrealized Profits/ Losses
Realized profits/ losses are those which have been recorded by closing out trades at different prices while unrealized profits/ losses are those which remain open but have not yet been closed out at different prices. Realized profits occur when you close out your trade at a profit whereas unrealized profits occur when your position remains open but has increased in value since you opened it. Similarly, realized losses occur when you close out your trade at a loss whereas unrealized losses occur when your position remains open but has decreased in value since you opened it.
Future Value
Future value refers to the expected worth of an asset at some point in time after its purchase date. For example, if an investor stakes Tron TRX $0.0710 worth $1,000 with 4% yearly reward, they can expect its future worth to be $1,040 after one year – that is present value ($1,000) + future return ($40). This can be calculated using various methods such as FIFO (first-in first-out), LIFO (last-in first-out), YTD (yearly total returns), etc., depending upon how specific one wants their analysis to be.
Calculating Profit & Loss
To calculate overall gains/ losses made through trading cryptocurrencies over various points of time, simply subtracting opening balance from closing balance gives us our net profitability or loss during that period of time – Closing Balance – Opening Balance = Net Gain/ Loss during that period of Time.. As such, understanding how to compute profit and loss may help traders better manage their cryptocurrency investments and trading activities more effectively by tracking their portfolio’s performance accurately over time