Lately, I’ve been thinking that many beginners in the crypto space are actually clueless about their trading situation. They clearly lose money, yet can’t tell whether they’ve already taken a real loss or if it’s just a paper loss. In fact, this is the core meaning of PnL—understanding the essence of profit and loss.

Let’s start with the basic concepts. In crypto trading, PnL is used to measure whether your investment is making money or losing money. But there’s a key point here: not all losses are the same. Some are realized gains or losses (you’ve actually sold), and some are unrealized gains or losses (you haven’t closed the position yet—it's only a paper loss).

Mark-to-market (MTM) valuation is an important concept. Simply put, it means calculating how much your assets are worth based on the current market price. For example, if you hold Ethereum (ETH), its value changes every day according to the market price. Yesterday it might have been $1950, and today it becomes $1970—then your unrealized profit is $20. Conversely, if it drops to $1940, that’s a $10 loss.

Realized PnL is real money. Only when you truly close a position (sell the crypto) does that PnL count. For example, you buy Polkadot (DOT) at $70 and sell it at $105—that’s a real profit of $35. But if you sell at $55, that’s a loss of $15. At this point, no matter how the market fluctuates afterward, the result is already locked in.

Unrealized PnL is different. You still hold the position—you’re just watching the numbers on the screen move up and down. For example, if you bought ETH contracts at an average of $1900, and the mark price is now $1600, your unrealized loss is $300. But as long as you don’t close the position, there’s still a chance to turn things around.

So how do you calculate it? I’ve found many people get confused. There are three most common methods. First-In-First-Out (FIFO) calculates based on the price from your earliest purchase. For example, Bob first buys 1 ETH at $1100, later buys another at $800, and finally sells at $1200. Using FIFO, your initial cost basis is $1100, so your profit is $100.

Last-In-First-Out (LIFO) is the opposite—it uses the most recent purchase price. Using the same example, your initial cost becomes $800, and your profit becomes $400. Which method is more favorable—you can figure that out for yourself.

There’s also the weighted average cost method, which is suitable when you’ve bought multiple times. Alice buys 1 Bitcoin (BTC) at $1500 and another at $2000, so her average cost is $1750. Later, she sells at $2400, making a profit of $650. This method is relatively fair and won’t let the order of purchases affect the result.

In real trading, I recommend checking your open positions regularly. Buying is called opening a position, and selling is called closing it. For example, if you buy 10 DOT at $70 and sell at $100, that’s a $30 profit. But many people open positions and then don’t care, and in the end they end up losing badly.

If you’re a long-term holder, you can look at your Year-to-Date (YTD) performance. For example, if you held $1000 worth of Cardano (ADA) on January 1, 2022, and by January 1, 2023 it’s worth $1600, that means you have an unrealized profit of $600. This metric is especially suitable for evaluating your investment results over a year.

Perpetual contract PnL calculation is a bit more complex because there’s no expiration date. You need to calculate both realized and unrealized gains or losses at the same time, and then add them together. But be aware of hidden costs like trading fees and funding rates.

Honestly, knowing what PnL means isn’t enough—you also have to consider real-world factors such as taxes, transaction fees, and market volatility. And sometimes percentage profit tells a better story than absolute dollar amounts. For example, if you buy Binance Coin (BNB) at $300 and sell at $390, your profit is $90, which sounds like a lot, but in percentage terms that’s 30%. Comparing percentages makes it clear against other trades.

Now there are many tools that can help you automatically calculate these—things like spreadsheets and trading bots. But I think what’s truly important is understanding the logic behind it. As long as you get clear on your cost basis, the trading quantity, and the price of each trade, you can accurately evaluate how efficient your strategy is. Then next time you make a trading decision, you won’t trade blindly.