Like any regular business, cryptocurrency trading is usually motivated by a desire to make a gain or profit. However, based on the risks involved in business, there is also a likelihood of incurring a loss if the right decisions are not made due to misplaced or misinformed planning. The implication of such losses can be really telling, especially when the amount invested is significant. Thus, every person trading crypto necessarily has to know how to calculate profit and loss. Failing to do such calculations would amount to making a blind investment and pose trading difficulties as you will never know when the time is favorable to sell your assets and make money.
Crypto Profit and Loss Definition
The concept of crypto profit and loss is an easy one to grasp for those trading the asset. Whenever you sell or dispose of your crypto asset, you will be making either a profit or a loss. You make a profit on your crypto asset when you sell your crypto for more than the price at which you bought it, and you make a loss when you sell it for less than what it cost you to buy it.
Calculation of Crypto Profit and Loss
When calculating your profit in cryptocurrency trading, a good point to start is knowing and taking into account your breakeven price. This is important to help you draw proper contrast to determine whether a profit or loss is to be made.
Let’s use a simple illustration. Assuming you bought 1 Bitcoin (BTC) a month ago for $8,000. This becomes your breakeven price. Today, when you checked the market, you noticed the price of a Bitcoin has increased to $8,250. To know your potential profit, you simply subtract the breakeven price from the current market price.
Subtracting $8,000 from $8,250 will result in $250. This means that if you sell your Bitcoin today, you will be able to earn a profit of $250. You can then decide if you want to make the sale and earn this profit immediately, use it to buy another crypto asset, or leave it with the expectation of earning more on it.
This is only a basic illustration of how you can calculate your profit. The action becomes more complex where you have coins in multiple cryptocurrencies, when you trade regularly, and when you have varying price point targets for each cryptocurrency asset.
When calculating your profit, there are other metrics of profit and loss that should be borne in mind. So, besides calculating your total profit, you might also need to use some other metrics, depending on the targets you set. These metrics include:
1. average buy price and sell price
2. realised profit (profit made on coins which you sold already,
3. unrealised profit (profit from calculations done with the current market price),
4. total profit (the sum of the realised and unrealised profit).
Using unrealized profit
Most times, traders in the crypto market become impatient, deciding to take profits and leave the market even when there’s an upward trend. In other cases, traders fail to sell their crypto assets when they should. Considering the volatility of the market and the contrasting possibilities, it is important to keep a constant watch on the market.
Say you bought BNB for $160 and it rose to $180. You would have already made a profit of $20. But you’re actually yet to sell your assets so you have not really earned the profit until you sell off 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
A larger number of traders in the crypto market prefer using the percentage approach to calculate their profit and loss. To achieve this, you can calculate your crypto profit by multiplying by the percentage increase in the value of your crypto asset.
To do so, you have to multiply the price at which you bought the crypto (breakeven price or entry price) by the corresponding percentage expression. For instance, if you bought BNB at $2 entry price, and you only want to make 10% of the trade and sell your assets, you would have to multiply your entry price by the corresponding percentage profit of 10%. Thus, it would be $2 your entry price multiplied by 1.1 to get your exit price. The value of your assets would then be $2.2, less the entry price, to arrive at a profit of $0.2.
The rule of thumb is to add the number 1 every time you want to multiply by a hundred.
Importance of Effective Crypto Profit and Loss Calculation
But what is really the main deal of calculating profit? Why is it so important? The points have briefly been made at the outset of this piece, but here’s a detailed explanation for better insight and clarity.
You spend your personal money anytime you buy a cryptocurrency. When you decide later to dispose of the asset at a price higher than what you paid to buy it, you make a profit. If you fail to do a pre-calculation of the profit to accrue from your intended sale, you might end up selling the asset at a lower price than you actually should and thus incur a loss.
In addition, a mistake that is common to both new and old traders in some cases is waiting too long after buying a coin before selling or disposing of it. The truth is, unless you’re the strategy of leaving your crypto asset for a few years to earn profits, it could result in a major loss if you wait for too long.
It is actually good and profitable to buy low and sell high if you implement the strategy with a high measure of discipline. Otherwise, you are likely going to become tempted easily by an upward trend of a particular coin and wait for it to keep going higher. The risk involved here is that the price of such coins can suddenly drop and this would lead you to a loss rather than making a profit.
Setting a really high point of sales price risks the possibility of a sudden drop in the market price before you get the chance to sell.
This forms the essence or importance of calculating profit and loss on your cryptocurrency. It’s a much better strategy to stick to a plan and a price point that is realistic than simply adopting the approach of waiting for the price to go very high before moving to sell your crypto asset.
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Topic: How To Calculate Crypto Profit And Loss? (Read 8896 times)
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July 29, 2022, 12:03:52 PM