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Making accurate decision on profit and loss on crypto currency (make $10,000 with accurate calculation)

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

Profit and Loss refers to the financial gain or loss from buying and selling cryptocurrencies. To calculate it, use various method like the FIFO, LIFO, YTD, and more!

Anyone who has dealt with trading in traditional finance is likely to be aware of profit and loss (PandL). But is PandL in the cryptocurrency world the same? The ability to comprehend terms like mark-to-market (MTM), realized PandL and unrealized PandL will help develop a better understanding of the cryptocurrency a person holds.

Without a well-defined process to get insight into profit or loss, cryptocurrency trading may be overwhelming, and traders may struggle with what they are doing. PandL reflects the change in the value of a trader’s positions over a specific period.

To gain a clearer understanding, let’s examine it in the context of cryptocurrency trading.

Understanding the basics of PandL

PandL in crypto refers to the calculation of the profit or loss made on a cryptocurrency investment or trading position. It is a metric used to evaluate the financial performance of a trader or investor in the crypto market.

To begin, here are some key terms in PandL terminology:

MTM

MTM refers to the process of valuing an asset or financial instrument based on its current market price or fair value. For example, in the context of crypto trading, if an investor holds a certain amount of Bitcoin

BTC

tickers down

$26,396

, the value of that Bitcoin will fluctuate based on the current market price.

The general formula for calculating PandL is:

Suppose the MTM price for Ether

ETH

tickers down

$1,801

today is $1,970, while the MTM price yesterday was $1,950. In this case, the PandL is $20. It indicates a profit of $20. On the contrary, if the MTM price of ETH was $1,980 yesterday, it indicates a loss of $10.

Future value

Future value indicates the value of a digital coin at a future point in time.

For example, if a trader stakes Tron

TRX

tickers down

$0.0774

worth $1,000 with a 4% yearly reward, how much will the person get back after a year? The answer is $1,040. At the time of staking, the present value will be $1,000, while the future value will be $1,040.

There will be a present value at the point when the trader stakes, but if the person considers the future as a whole, there could be countless future values.

There is a different way to use future value as well. Traders could ask how much to stake to get $1,040 in a year. If they know the present and future values, they could calculate the discount factor. examples:

Realized PandL

Realized PandL is calculated after traders have closed their position (sold the cryptocurrency they hold). Only the executed price of the orders is taken into account in realized PandL, and it has no direct relation to the mark price.

The mark price is the price at which a derivatives contract is valued based on the current market price of the underlying asset rather than the price at which the contract is being traded.

The formula for realized PandL is

An example will help understand how to calculate realized PandL. If the entry price for buying X number of Polkadot

DOT

tickers down

$5.28

is $70 and the exit price is $105, the PandL for the period is $35, which refers to a profit of $35. However, if the closing price of the trade was $55, the PandL will be $15, but it will reflect a loss.

Unrealized PandL

Unrealized PandL refers to the profit or loss that is currently held in open positions but has not yet been realized through closing the position. The formula for determining unrealized PandL is:

Donald has purchased ETH contracts with an average entry price of $1,900. The mark price of ETH is currently $1,600. The unrealized PandL for Donald is the difference between the average entry price and the mark price.

Unrealized PandL = $1,900 – $1,600 = $300

How to do PandL calculation

To determine PandL in cryptocurrency, a trader needs to find the difference between the initial cost of acquiring a digital coin and the current market value of the same coin. Various methods to calculate PandL in cryptocurrency are as follows:

First In First Out

The FIFO method requires the seller to use the price of the asset from when it was first bought. Here is the process to calculate PandL using the FIFO method:

1) To settle on the initial cost of the cryptocurrency, multiply the purchase price per unit by the number of units sold.

2) To determine the current market value of the asset disposed of, multiply the current market price per unit by the number of units sold.

3) To find the PnL, deduct the initial cost from the current market value.

Suppose Bob first bought 1 ETH at $1,100 and a few days later bought 1 ETH at $800. A year later, he sold 1 ETH at $1,200. As he had first bought ETH at $1,100, this price will be considered the initial cost. Applying the FIFO method, Bob could calculate PnL as follows:

Bob’s initial cost = (1 ETH x $1,100) = $1,100

Current market value = (1 ETH x $1,200) = $1,200

PandL = $1,200 – $1,100 = $100 (profit)

Last-in, first-out (LIFO) method

The LIFO method requires the seller to use the most recent purchase price of an asset in the calculation. The other aspects are just like the FIFO method. Here is the PandL using the LIFO method using the same example as above:

Bob’s initial cost = (1 ETH x $800) = $800

Current market value = (1 ETH x $1,200) = $1,200

PandL = $1,200 – $800 = $400 (profit)

Weighted average cost method

The weighted average cost method requires traders to determine the average cost of all units of a digital currency in their portfolio to arrive at the initial cost. Here are the steps to calculate PandL using this method:

1) Determine the total cost of all units of the cryptocurrency. Multiply the purchase price per unit for each transaction by the number of units of the asset and add the numbers.

2) To arrive at the weighted average cost per unit of the digital coin, divide the total cost of all units by the number of units.

3) Find the current market value of the cryptocurrency sold. Multiply the current market price per unit by the number of units sold.

4) To determine PandL, subtract the average cost per unit from the current market value.

Suppose Alice bought 1 BTC at $1,500 and a few days later bought 1 BTC at $2,000. She later sold 1 BTC at $2,400. Here is the PandL using the weighted average cost method:

Total cost = (1 BTC x $1,500) + (1 BTC x $2,000) = $3,500

Weighted average cost = $3,500 / 2 BTC = $1,750

Current market value = (1 BTC x $2,400) = $2,400

PandL = $2,400 – $1,750 = $650 (profit)

Profits/losses from opening and closing positions

Analyzing open and closed positions at regular intervals is an efficient way to monitor performance. An initial purchase a person makes in the market is an open position, while selling the cryptocurrency is termed closing the position. If a trader buys 10 DOT, it is an open position. When the trader sells those DOT, the position gets closed.

For example, if a trader bought 10 DOT for $70 and sold them for $100, the person’s PandL would be $30 ($100 – $70). Regular analysis of trades in line with open and closed positions helps a person trade in an organized manner.

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