If you’re engaged in trading cryptocurrencies, you know how important it is to track your income and expenses. After all, trading is about making money! To evaluate the performance of your crypto portfolio, you need a specific financial indicator called PnL, which stands for crypto profit and loss.
Using this metric, you can assess the effectiveness of your crypto trades. It is vital because you can determine which strategies work well and which ones are better to abandon. By regularly analyzing your PnL, you’ll learn to make informed decisions in trading and earn more!
Understanding PnL in Crypto
PnL is the difference between buying and selling cryptocurrency. For example, you bought 1 Bitcoin for $30,000. After some time, the price went up, and you sold your BTC for $31,000. Your profit in this transaction would be:
PnL = Selling Price – Buying Price
$31,000 – $30,000 = $1,000
So, you earned $1,000! It is your positive PnL.
But what if the price drops? Let’s say you bought Bitcoin for $30,000 again but sold it for only $29,000. In that case, the formula would look like this:
$29,000 – $30,000 = -$1,000
A negative PnL of $1,000 means that you incurred a loss of $1,000.
You can calculate it for individual transactions or any period in general. The key is to subtract the purchase price from the selling price. If you get a positive number, you have a profit, and if it’s negative, it means a loss.
Different Types of PnL
There are two variations — realized and unrealized. Let’s delve into their differences.
Realized is your actual profit or loss. It is calculated based on closed trades when you bought and sold cryptocurrency. We’ve discussed examples of this earlier.
Unrealized pertains to open positions. It shows what your profit or loss would be at the current moment if you were to close the trade at the current price. Unrealized changes in the coin’s price and becomes real after you close the position.
For instance, you bought 1 ETH at $1500. After that, the price has risen to $1550, but you still hold that ETH in your portfolio. To calculate your unrealized PnL, you would look at:
- PnL = Current price – Purchase price
- PnL = $1550 – $1500 = $50
If you sell the ETH at the current price of $1550, you make a profit of $50. However, until you do that, the $50 is considered unrealized profit.
Calculating PnL in cryptocurrency trading
To understand profit and loss calculations better, let’s consider a few examples of different trading scenarios.
Example 1: Profitable Trade
You bought 2 ETH for $1200 per coin and sold them a week later for $1300 each.
- Purchase Price = 2 * $1200 = $2400
- Selling Price = 2 * $1300 = $2600
- (Profit and Loss) = Selling Price – Purchase Price = $2600 – $2400 = $200
In this example, your profit was $200.
Example 2: Losing Trade
You opened a long position on XRP by buying 300 coins at $0.5 each. Then, the price dropped, and you closed the trade at $0.4.
- Purchase Price = 300 * $0,5 = $150
- Selling Price = 300 * $0,4 = $120
- $120 – $150 = -$30
Your loss in this trade was $30.
Example 3: Unrealized PnL
You purchased 1 BTC for $29000. A few days later, the price rose to $29200, but you haven’t sold the BTC yet.
- Purchase Price = $29000
- Current Price = $29200
- Unrealized PnL = $29200 – $29000 = $200
In this case, the unrealized profit is $200, but it can change if the Bitcoin price continues to rise or fall.
Example 4: Cumulative PnL for a Period
Let’s say you had three trades in a month:
- Profit of $500
- Loss of $300
- Profit of $400
To calculate your total PnL, sum up the results of all trades:
$500 – $300 + $400 = $600
Your cumulative PnL for the month was $600. You can use this information to evaluate the overall effectiveness of your trading.
As you can see, calculating is relatively straightforward. The key is to do it regularly and analyze the results.
The Role of PnL in Trading Strategies
Tracking PnL is essential for successful cryptocurrency trading. Here are the main reasons:
- Evaluating Strategy Effectiveness: by analyzing your data, you can determine which strategies consistently generate profit and which ones should be abandoned.
- Emotion Control: a clear view of your PnL allows you to make informed decisions, avoiding impulsive actions driven by emotions.
- Risk Management: analyzing helps identify the maximum potential losses in trades and prevents unwarranted risks.
- Enhancing Discipline: regularly calculating motivates you to stick to your chosen strategy and adhere to the rules.
- Progress Assessment: comparing PnL over different periods enables you to gauge your trading progress and set new goals
Serious cryptocurrency trading is challenging without considering PnL. Utilize this metric to take your results to the next level!
Is PnL Important for Traders?
We’ve discussed the meaning of PnL in crypto, how to calculate it, and how it’s used to evaluate cryptocurrency trading results. But is this indicator truly crucial for traders? Let’s think about it.
On one hand, it provides an objective picture of a trading strategy’s financial performance. It helps traders understand which strategies are working well and which are resulting in losses. With this data, traders can optimize their approaches and enhance their results.
However, there’s another side to this. It’s essential to understand that PnL primarily consists of historical data about past performance. As we know, past profitability doesn’t guarantee the same results in the future. Markets are constantly evolving, with some strategies becoming more effective and others less so.
Relying solely on PnL, a trader risks falling into the illusion of control over the market. It may seem like they’ve developed a perfect trading system that will continuously generate profits. However, the market can shift at any moment and erase the results of even the best strategies.
In conclusion, we see that PnL is a useful but not a universal tool. Besides this metric, traders must develop critical qualities such as discipline, patience, adaptability, and emotional control. Indeed, psychology often plays a decisive role in trading success.
So, PnL should be considered as one element in the comprehensive toolkit of a professional trader. Relying solely on it for long-term success is insufficient. Only a systematic approach, including continuous self-improvement, can lead to stability and prosperity in the cryptocurrency market.