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What is profit and loss (PnL) and how to calculate it

What is profit and loss (PnL) and how to calculate it

Anyone familiar with trading in traditional finance is likely familiar with profit and loss (PnL), but is PnL in the world of cryptocurrency the same? Understanding terms such as mark-to-market (MTM), realized PnL, and unrealized PnL can help traders gain better insight into the cryptocurrency market. Without a well-defined process to gain insight into profit or loss, cryptocurrency trading can be overwhelming and traders may struggle. PnL represents the change in the value of a trader’s positions over a specific period. Understanding PnL in the context of cryptocurrency trading is essential.

PnL in the world of cryptocurrency refers to the calculation of profit or loss made on a cryptocurrency investment or trading position, used to evaluate the financial performance of a trader or investor in the crypto market. Mark-to-market (MTM) refers to the process of valuing an asset or financial instrument based on its current market price or fair value. Realized PnL is calculated after traders have closed their position and is only based on the executed price of the orders. Unrealized PnL refers to the profit or loss that is currently held in open positions but has not yet been realized through closing the position.

To calculate PnL in cryptocurrency, traders need to find the difference between the initial cost of acquiring a digital coin and the current market value of the same coin. There are various methods to calculate PnL in cryptocurrency, including First-in, first-out (FIFO) method, Last-in, first-out (LIFO) method, weighted average cost method, transaction-based calculation, and year-to-date (YTD) calculation.

Analyzing open and closed positions at regular intervals is an efficient way to monitor performance. Year-to-date (YTD) calculation measures the performance of investments made in cryptocurrency from the start of the year to the current date. Transaction-based calculation involves calculating the PnL for each specific transaction.