I’ve been trading for a few years and I see a lot of people coming into the crypto market without really understanding how profit and loss work. The crowd comes from traditional finance thinking it’s all the same, but there are some peculiarities. Let me break it down for you.

PnL basically measures how much your position gained or lost over a period. It sounds simple, but there are several important details. When you understand the fundamentals of PnL and crypto investing, you can make much better decisions.

There are some terms you need to master. MTM (mark-to-market) is when you evaluate your asset using the current price. If you have Bitcoin and the price changes, your Bitcoin is now worth something different. Just like that. The basic formula is: current price minus previous price. If ETH was at $1,950 yesterday and today is at $1,970, your PnL is $20 positive. If it drops to $1,940, then you have $10 a loss.

Now, there’s a crucial difference between realized PnL and unrealized PnL. Realized is when you close the position — you sell the crypto you had. Then you know exactly how much you gained or lost. Unrealized is that gain that exists on paper while you still hold the asset. A lot of people mix this up.

I’ll give a practical example. You buy Polkadot at $70 and sell it for $105. Your realized PnL is $35 a profit. But if you still have it, and the price falls to $55, then your unrealized PnL turns into $15 a loss. Got it?

There are three main methods to calculate all of this. FIFO (first in, first out) uses the price of your oldest purchase. LIFO (last in, first out) uses the most recent purchase. And there’s the weighted average cost, which is the average of everything you bought. Each one gives a different result.

Let’s take an example with Bitcoin. You buy 1 BTC for $1,500, then another for $2,000. You sell 1 for $2,400. Using the weighted average cost, your initial cost is $1,750 (average of the two). Final profit is $650. With LIFO it would be $400. With FIFO it would be $900. See the difference?

A lot of people track only total PnL, but what really matters is analyzing position by position. When you buy, you open a position. When you sell, you close it. Monitoring this regularly helps you understand what’s working.

There’s also the year-to-date total — basically you compare how much crypto you had at the start of the year with how much you have now. If you started 2025 with $1,000 in ADA and ended with $1,600, your unrealized profit is $600. This gives a good view of overall performance.

For a percentage view, you just divide the profit by the initial cost and multiply by 100. You buy BNB for $300, sell for $390, profit of $90. Percent-wise, that’s a 30% return.

Now, if you work with perpetual contracts (those that don’t have an expiration date), you need to add realized PnL and unrealized PnL to get the total. But then other variables come into play, such as financing rates.

The big secret is that understanding PnL and crypto investing goes beyond the numbers. You need to consider fees, taxes, and volatility. In real life, it’s more complex than these simplified examples.

I use spreadsheets and some analysis tools to keep an eye on my performance. It helps a lot to identify which strategies are working and where I’m making mistakes. Anyone who wants to grow as a trader needs this clarity in the numbers.