Recently, many novice traders are confused about their profit and loss (PnL), and some don't even clearly understand whether they are making money or losing money. In fact, this is a common issue because calculating PnL in the crypto market is much more complex than in traditional finance.
Let's start with the most basic concept. Mark-to-market (MTM) valuation is estimating your assets based on current market prices. For example, if you hold Bitcoin, its value will fluctuate with the market price. If today’s MTM price of Ethereum is $1,970 and yesterday’s was $1,950, then your PnL is a $20 profit. Conversely, if the price drops, it would be a loss.
But here’s a key distinction many people overlook—realized profit and loss and unrealized profit and loss are completely different. Realized PnL only becomes certain when you close a position (sell the crypto you hold). For example, if you bought Polkadot at $70 and sold it at $105, that’s a realized profit of $35. But if you haven't sold yet and are just watching the price fluctuate, that’s unrealized PnL—your PnL is floating and can change at any moment.
Regarding calculation methods, I think the three most commonly used approaches are worth understanding deeply. First-in, first-out (FIFO) calculates based on your earliest purchase prices; last-in, first-out (LIFO) uses the most recent purchase prices; the weighted average cost method takes the average price of all purchases. For example, Bob bought two Ethereum at $1,100 and $800 respectively, and later sold one at $1,200. Using FIFO, the profit is $100; using LIFO, it’s $400. The same transaction yields very different results depending on the method, which is why it’s crucial to know which method you’re using.
Another often overlooked aspect is the Year-to-Date (YTD) calculation. If you are a long-term holder, comparing your portfolio value at the start and end of the year can clearly show your unrealized profit for the year. For instance, if you held $1,000 worth of Cardano at the beginning of 2022, and it grew to $1,600 by the start of 2023, that’s an unrealized profit of $600.
Perpetual contract PnL calculation is even more complex because it involves maintaining margin and funding rates. You need to calculate both realized and unrealized PnL simultaneously and then sum them up. But remember, in actual trading, you also need to consider trading fees, taxes, and other variables.
I recommend evaluating trading performance using profit percentage, which is more intuitive. For example, if you buy BNB at $300 and sell at $390, your profit is $90, but the percentage profit is 30%. Comparing percentage returns makes it clearer how efficient different trades are.
Honestly, precise calculation of your PnL is very important for improving your trading strategy. Many people are reluctant to do detailed calculations, and as a result, they can’t see which trades are effective and which are losing money. There are many tools and automated bots now that can help track this, but understanding the underlying logic is still the most important. Only by truly understanding your cost basis, trade size, and the price of each transaction can you evaluate your strategy’s efficiency and make better trading decisions. This is my experience after trading on Gate for a long time.
