How do I calculate profit and loss on a crypto contract?

Understanding the Basics of Crypto Contract P&L

1. Profit and loss in crypto contracts depend on the difference between entry and exit prices, multiplied by the position size. Traders must know whether they are long or short, as this determines the direction of profit based on price movement.

2. For a long position, profit occurs when the exit price is higher than the entry price. The formula used is: (Exit Price – Entry Price) × Number of Contracts × Contract Multiplier.

3. In contrast, for a short position, profit arises when the exit price is lower than the entry price. The calculation becomes: (Entry Price – Exit Price) × Number of Contracts × Contract Multiplier.

4. The contract multiplier varies depending on the exchange and asset. For instance, some Bitcoin futures use 1 USD per contract, while others may use 0.001 BTC as the base unit.

5. Funding fees, if applicable in perpetual contracts, also affect net profit. These periodic payments between longs and shorts must be factored into the total return over time.

Key Variables That Impact Final P&L

1. Leverage amplifies both gains and losses. A 10x leveraged position will see a 10% price move result in a 100% change in equity, but it also increases liquidation risk.

2. Liquidation price plays a crucial role. If the market hits this level, the position is closed automatically, often at a loss, and remaining margin is forfeited or partially returned.

3. Trading fees are deducted upon opening and closing positions. Though small per trade, they accumulate and reduce overall profitability, especially for high-frequency strategies.

4. Slippage during volatile conditions can cause execution at less favorable prices than expected, particularly with large orders or low-liquidity pairs.

5. Some platforms use mark price instead of last traded price to calculate unrealized P&L, preventing manipulation and ensuring fairness during rapid price swings.

Practical Example of P&L Calculation

1. Suppose you open a long position on a BTC/USDT perpetual contract at $30,000, buying 10 contracts with a multiplier of $1. Your exposure is $300,000.

2. You close the position at $32,000. Applying the formula: ($32,000 – $30,000) × 10 × $1 = $20,000 gross profit.

3. Deduct opening and closing fees. If each is 0.05%, total fees amount to 0.1% of $300,000 + $320,000 = $620, reducing net profit to $19,380.

4. During the holding period, you paid funding fees three times at $50 each, totaling $150. Final profit becomes $19,230.

5. Had the price dropped to $28,000 before closing, the loss would be ($30,000 – $28,000) × 10 × $1 = $20,000, minus fees and funding, leading to a net loss of approximately $20,770.

Frequently Asked Questions

How is unrealized P&L different from realized P&L?Unrealized P&L reflects the current value of an open position based on the mark price. It changes with market movements but isn’t locked in until the position is closed. Realized P&L is the actual profit or loss recorded after closing the trade, including all fees and funding costs.

What role does margin play in contract P&L calculations?Margin serves as collateral for leveraged positions. While it doesn’t directly enter the P&L formula, insufficient margin can lead to partial or full liquidation, truncating potential profits or locking in larger losses than anticipated.

Can I have a positive P&L but still get liquidated?Yes, if the wallet balance drops below the maintenance margin due to adverse price movement, liquidation triggers regardless of prior gains. This often happens when volatility spikes and the mark price moves rapidly against the position.

Do different exchanges calculate P&L the same way?Most follow similar principles, but variations exist in fee structures, contract multipliers, funding mechanisms, and mark price methodologies. Always review the specific exchange’s documentation to understand how your P&L is computed.