By James Davis
If you have ever traded crypto, then there is a chance you know what the phrase ‘profit and loss (PnL)’ means. For those new to this nascent market, reading this guide will help you better understand PnL and how it is calculated.
Understanding the Basics of PnL
PnL is the calculation of the loss or profit realized on crypto investment. Crypto investors/traders can use this metric to evaluate their financial performance in the cryptocurrency market.
Here are some of the PnL terminologies:
MTM (Mark-to-Market)
MTM measures the value of an asset using its current price. Here’s how you calculate PnL based on MTM. Suppose you bought ETH at $1,700 yesterday, and its current price is $1,780; this would mean you have made a profit of $80. Conversely, if you acquired ETH for $1,800 yesterday, then you would have realized a loss of $20 today.
Future Value
This metric estimates the value of a crypto asset in the future. For instance, if a crypto trader stakes ETH worth $2,000 with a 3% annual reward, then the future value of their ETH holding will be $2,060.
Realized PnL
To calculate realized PnL, you must first close your position (sell your crypto holding). Here is an example of calculating realized PnL. Suppose you purchased Solana when it was priced at $24 and sold it when it surged to $74; the PnL will be $50 (profit). On the contrary, if SOL declines to $20 and you decide to sell, the PnL will be $4 (loss).
Unrealized PnL
Unrealized PnL indicates the loss or profit recorded in open positions. For example, if you are still holding Bitcoin that you purchased for $23,000, and its current market price is $22,700, the difference between the two prices becomes the unrealized PnL.
Methods for Calculating PnL
Below are some of the methods you can use to calculate PnL.
Weighted Average Cost Method
To determine PnL, you have to find the average cost of the tokens in your portfolio. Here is an example: Suppose you initially acquired 1 Bitcoin at $30,000, then bought another one after a few days for $35,000, and later sold 1 Bitcoin at $33,000; this is how you will use the weighted average cost method to calculate PnL:
Total cost = (1 Bitcoin * $30,000) + (1 Bitcoin * $35,000) = $65,000
Weighted average cost = $65,000/ 2 Bitcoin = $34,500
Current market value = (1 Bitcoin * $33,000) = $33,000
PnL = $33,000 – $34,500 = -500 (Loss).
Year-to-Date Calculation
An investor who uses this method measures the performance of their crypto investment from the beginning of the year to the current date. Here is an example to help you understand better: Suppose your BNB holding was worth $356 on January 1, 2023, but it’s valued at $370 on May 9, 2023, then in this case, unrealized PnL is $14 (profit).
Percentage Profit Method
Basically, what this method does is indicate the realized PnL as a percentage. For example, if you bought Litecoin for $50 and then sold it for $90, the realized PnL will be $40. To determine the percentage profit, divide the PnL by the buy price and then multiply the result by 100. That is, (($40/$50) * 100) = 80%.
Final Thoughts
Now that you have an idea of how to calculate PnL, I believe that this knowledge will help you to assess the effectiveness of your investment strategy and make adjustments where necessary.