How to Calculate Crypto Profit And Loss?
Crypto profit and loss is a simple concept for those who trade the asset. When you sell or dispose of a crypto asset, you will either make a profit or a loss. Here you will find everything you need to know about crypto, with some useful tips on how to do that.
Cryptocurrency trading, like any other business, is typically motivated by a desire to make a gain or profit. However, given the risks involved in business, there is also the possibility of incurring a loss if the right decisions are not made as a result of misplaced or misinformed planning. The implications of such losses can be extremely telling, particularly when the amount invested is substantial. As a result, anyone trading cryptocurrency must understand how to calculate profit and loss. Failure to perform such calculations would result in a blind investment and trading difficulties because you will never know when the time is right to sell your assets and make money.
Crypto Profit and Loss Definition
Crypto profit and loss is a simple concept for those who trade the asset. When you sell or dispose of a crypto asset, you will either make a profit or a loss. When you sell your crypto asset for more than the price you paid for it, you make a profit; when you sell it for less than the price you paid for it, you lose money.
Calculation of Crypto Profit and Loss
Knowing and taking into account your breakeven price is a good place to start when calculating your profit in cryptocurrency trading. This is necessary to help you draw the proper contrast to determine whether you will make a profit or a loss.
Let's look at a simple example. Assume you paid $8,000 for one Bitcoin (BTC) a month ago. This is your breakeven point. When you checked the market today, you noticed that the price of a Bitcoin had risen to $8,250. Simply subtract the breakeven price from the current market price to determine your potential profit.
Subtracting $8,000 from $8,250 yields $250. This means that if you sell your Bitcoin today, you will make a $250 profit. You can then decide whether to sell and earn the profit right away, use it to buy another crypto asset, or leave it with the hope of earning more money later.
This is only a basic example of how to calculate your profit. When you have coins in multiple cryptocurrencies, trade frequently, and have different price point targets for each cryptocurrency asset, the action becomes more complicated.
There are additional profit and loss metrics to consider when calculating your profit. So, in addition to calculating your total profit, you may need to use some other metrics, depending on the goals you set. These metrics are as follows:
- Average buy price and sell price,
- Realized profit (profit made on coins which you sold already,
- Unrealized profit (profit from calculations done with the current market price),
- Total profit (the sum of the realized and unrealized profit).
Using unrealized profit
Most crypto traders become impatient, taking profits and exiting the market even when the market is trending upward. In other cases, traders do not sell their cryptocurrency assets when they should. Given the market's volatility and the contrasting possibilities, it is critical to keep a constant eye on the market.
Assume you purchased BNB for $160 and it increased to $180. You would have already made a $20 profit. However, you have yet to sell your assets, so you have not earned the profit until you sell the assets at such trending prices.
Similarly, the price of the BNB can drop a little or go below the price at which you bought it. For example, if you bought BNB for $160 and the current market price is $130, you lost $30. However, you’re not really at a loss, as long you don’t make sales of your assets.
Multiplying to get the percentage profit
The percentage approach is preferred by a greater number of traders in the cryptocurrency market for calculating profit and loss. To accomplish this, multiply your crypto profit by the percentage increase in the value of your crypto asset.
To do so, multiply the price you paid for the cryptocurrency (breakeven price or entry price) by the corresponding percentage expression. For example, if you bought BNB at a $2 entry price and only want to make 10% of the trade and sell your assets, you would multiply your entry price by the corresponding 10% profit percentage. Thus, your entry price of $2 multiplied by 1.1 equals your exit price. Your assets' value would then be $2.2, less the entry price, for a profit of $0.2.
When multiplying by a hundred, the rule of thumb is to add the number 1.
Using a spreadsheet
Making a spreadsheet in Microsoft Excel is an efficient way to calculate your profit. You can enter your entry price, the current market price, the number of coins, and the appropriate profit formula into the spreadsheet you created.
The disadvantage of using a spreadsheet is that all of the data used to calculate your profit must be manually entered. Given the daily fluctuations in market prices, you must be quick to update prices. When you have multiple cryptocurrencies, it becomes more difficult and time-consuming. As a result, the spreadsheet method may be time-consuming, and manual data entry may result in input errors. If however, you’re only starting out with a few coins, then the spreadsheet method is a good way to calculate your profit.
Crypto trading calculators
The use of cryptocurrency trading calculators, which are widely available online, is the simplest and most effective way to calculate your profit when trading cryptocurrencies. So, if you find using a spreadsheet too time-consuming and complicated, you can easily find a trading calculator that works best for you.
The great thing about crypto trading calculators is that they are not only convenient, but most of them are also available with a free trial period or for a low cost.
Importance of Effective Crypto Profit and Loss Calculation
In the cryptocurrency market, you're taught to "buy low and sell high." In other words, you must keep a close eye on the market and the price trends of each crypto asset, and strike when the price is low. Cryptocurrencies with an upward trend will eventually rise in price, and that would be the best time to sell yours and make a good profit.
When you buy a cryptocurrency, you are spending your own money. You make a profit when you decide to sell the asset at a higher price than you paid for it. If you fail to calculate the profit that will accrue from your intended sale, you may end up selling the asset at a lower price than you should, resulting in a loss.
Furthermore, in some cases, both new and experienced traders make the mistake of waiting too long after purchasing a coin before selling or disposing of it. The truth is that unless you have a strategy of leaving your crypto asset for a few years to earn profits, waiting too long could result in a significant loss.
Conclusion
One of the most important skills to have when trading cryptocurrency is the ability to calculate your profit. You can use a personal spreadsheet or a cryptocurrency trading calculator. The important thing is that you understand how much profit you stand to make so that you can decide whether to sell or wait for a better opportunity.
