Recently, a friend asked me how to calculate profit and loss (PnL) in crypto trading, and I realized that many people are actually not very clear about this. People might understand the profit-and-loss concept in traditional finance to some extent, but in the crypto world—things like mark-to-market valuation, realized and unrealized PnL—there’s definitely a lot of room for confusion.

Let’s start with the most basic one. In crypto trading, PnL refers to how much profit or loss your investment or trading position makes over a specific period. Without a clear calculation method, trading really can become confusing, and even make you doubt what you’re doing.

Mark-to-market (MTM) is a key concept. Simply put, it means valuing your assets based on the current market price. For example, if you hold some Bitcoin, its value will fluctuate with market prices. Take an example: if Ethereum’s MTM price today is 1970 US dollars and yesterday it was 1950 US dollars, then today you’ve made 20 US dollars. Conversely, if yesterday was 1980 US dollars and today is 1970 US dollars, then today you’re down 10 US dollars.

Next, you need to distinguish between realized and unrealized PnL. Realized PnL is calculated only after you actually close (sell) your position. For example, if you buy Polkadot (DOT) at 70 US dollars and sell it at 105 US dollars, that is a profit of 35 US dollars. But if you ultimately close at 55 US dollars, it becomes a loss of 15 US dollars. This calculation only looks at the buy and sell prices and is not affected by the mark price.

Unrealized PnL is the profit or loss on the position you still hold, but haven’t sold yet. For example, someone bought an Ethereum contract at an average of 1900 US dollars, and the current mark price is 1600 US dollars—then the unrealized loss is 300 US dollars. This number will change as the market moves.

There are several ways to calculate PnL. The most common is FIFO (First-In, First-Out), which calculates based on the earliest purchase price. Assume Bob first buys 1 Ethereum at 1100 US dollars, and a few days later buys 1 Ethereum at 800 US dollars. Then a year later he sells 1 Ethereum at 1200 US dollars. Under FIFO, you use 1100 US dollars as the cost basis, so the final profit is 100 US dollars.

But if you use LIFO (Last-In, First-Out), you use the most recently purchased 800 US dollars as the basis, and then the profit becomes 400 US dollars. There’s also the weighted average cost method, which averages the costs of all purchases. If Alice buys 1 Bitcoin at 1500 US dollars and then buys 1 Bitcoin at 2000 US dollars, the average cost is 1750 US dollars. Later, if she sells it at 2400 US dollars, the profit is 650 US dollars.

Regularly checking open positions is important. Your first buy is called opening a position, and selling is closing a position. For example, if you buy 10 DOT at 70 US dollars and sell at 100 US dollars, then the profit and loss is 30 US dollars. Analyzing trades in an organized way can help you understand your performance more clearly.

Year-to-date (YTD) calculations are also very useful. For example, suppose you held Cardano worth 1000 US dollars on January 1, 2022, and by January 1, 2023 it becomes 1600 US dollars—then your unrealized profit is 600 US dollars. This method is especially suitable for long-term investors.

Another thing that’s often overlooked is the profit percentage. If you buy a coin at 300 US dollars and sell it at 390 US dollars, your profit is 90 US dollars, and the percentage profit is 30% (90÷300×100). This makes it easier to see your return on investment more directly.

The PnL calculation for perpetual contracts is a bit more complex because there’s no fixed settlement time. You need to calculate both realized and unrealized PnL at the same time, then add them together. As long as your margin is sufficient, you can hold your position indefinitely.

Honestly, in real trading you also need to consider factors like trading fees, taxes, market volatility, and so on—what’s above are simplified examples. But by mastering these basic concepts, you can evaluate whether your trading strategy is effective more clearly. Many people now use spreadsheets or automated trading bots to track PnL, which can save a lot of time. The key is to regularly analyze your cost basis, trading quantity, and the price of each trade, so you can make better trading decisions.