Why do we calculate profit and loss?
Cryptocurrencies are the most volatile financial asset class you can invest your money in. It’s quite normal for top cryptocurrencies to have daily price swings of several percent, while lower cap altcoins can even have a price change as dramatic as several tens of percent in a short period of time.
This means that traders can lose a lot of money very fast when investing in crypto, but they can also earn a lot of cash real quick if they invest carefully and buy or sell crypto at the right moment.
Thousands of traders lose much more than they earn from crypto trading because they don’t have a clear trading plan and strategy. For instance, one of the biggest mistakes beginner crypto traders make is that they don’t calculate their crypto profits and losses.
Let’s take a look at the importance of calculating crypto profits and discover the most popular methods for tracking the profitability of your crypto trading activity.
How to Calculate Crypto Gains?
There are multiple methods for calculating your crypto profits and losses. Each of them is quite simple and can be used to monitor the total profitability of your portfolio.
It’s very important to have a strict crypto profit calculating methodology and be consistent with it, so you can always know exactly where you stand with your profits and losses. It doesn’t matter which trading strategy you choose if you aren’t keeping records of your gains and losses because you won’t be able to measure the success level of your strategy.
Below are the five most popular methods for calculating your crypto profits.
Subtraction of Buy From Sell Value
One of the easiest methods for calculating the profitability of a crypto trading deal is subtracting the buying price of your crypto from their selling price. This is an easy way to find out exactly how much money you’ve made from a sale.
Let’s say you bought 1 Ethereum (ETH) coin for 3,000 USD and sold it one month later when the price of Ether went up by 500 USD per coin, closing the sale at 3,500 USD. If you subtract the buying price of 3,000 USD from your sale price of 3,500 US dollars, you’ll end up with a 500 USD profit from your Ethereum trade.
You can use the same method to calculate your crypto losses. Let’s say you’ve bought 1 ETH for 3,000 USD, but the price went down to 2,500 USD per coin within a short period of time. You decide to sell your Ethereum, afraid the price will keep getting lower, ending with a 500 USD crypto loss.
In order to use this method efficiently, you need to keep records of your initial buy prices. An easy way to monitor your buy prices is by viewing your personal order book and transaction history on the crypto exchanges you’re using for trading.
Profit Percentage Calculation
Calculating crypto profits by using percentage is another common method, usually used among experienced traders who are more interested in monitoring the percentage increase of their portfolio after a trade than just the straightforward US dollar digits. This calculation method is often used by brokers who are targeting a certain sell price and planning their sell zones in which they want to take profits.
To calculate your profits in percentage, you need to multiply your initial buy price by the percentage you’re targeting to take profits at. For instance, if you wish to take profits at a 10% price increase of the crypto you’re holding, you need to take the buy price of your crypto and multiply it by 1.1 or 1.2 for a 20% increase.
Let’s take a look at an example of how this calculation method works. Imagine you bought Ripple (XRP) for a price of 0.90 USD per coin, and you want to sell it once it reaches a 20% increase. You’ll take the buy price of 0.90 USD and multiply it by 1.2. Your target selling price is 1.08 USD per XRP coin if you want to take 20% profits on your Ripple investment. Your potential profit is 0.18 USD in this case.
The unrealized gains model is a very useful crypto profit calculation methodology that lets traders plan in advance. However, this method requires traders to pay close attention to the crypto market and constantly monitor price changes, which is why it’s best to use portfolio tracking software or to turn on the price change notifications in your crypto wallet.
Unrealized gains are profits you haven’t taken from the market, but you can do so if you decide to. For example, if you’ve bought some Solana (SOL) for 100 USD per coin, and the price of SOL increases to 150 USD per coin, you’re looking at 50 USD of unrealized gains per SOL coin. You haven’t sold your Solana yet, so the gains are unrealized, but if you do decide to take profits and sell your Solana, you’ll be able to turn those unrealized gains into real profit.
The only thing you need to pay attention to is the high market volatility because if you place a sell order on a crypto exchange for your SOL coins that cost 150 USD per coin, and the price drops to 130 USD in the meanwhile, you won’t be able to realize the initial 50 USD per coin profit calculation. That’s why you need to be extremely fast when trading crypto and placing market orders, as prices can quickly change in the wrong direction.
Crypto Profit Calculator Platforms
CoinLedger.io provides comprehensive support for various cryptocurrencies, making it an ideal tool for calculating capital gains taxes on your diverse crypto portfolio. This versatility means you won’t have to rely on multiple tools or platforms to manage your tax obligations for different digital assets.
The calculator on ProfitCalc App is another simple crypto calculator with a strong selection of cryptocurrencies. The platform will automatically calculate your profits or losses in real-time. It’s a good idea to combine a crypto calculator with your personal profitability spreadsheet and enter the results from the platform into the appropriate section of the spreadsheet.
An additional, very useful method for calculating your crypto profits is by using specialized crypto profit calculator platforms such as Cryptoprofitcalculator.com. You can choose from a wide range of cryptocurrencies, enter the number of bought coins, the buy price, and the sell price, as well as the investment/exit fees.
Crypto Trading Spreadsheet
Using an Excel spreadsheet is one of the most thorough methods for keeping track of the profits and losses of your crypto trading activity. You just need to enter all of the key parameters of your trading deals and regularly update the spreadsheet.
In order to create a crypto profitability spreadsheet, you need to create five sections. One section should list the names of the cryptos you’re trading, the second one should contain the number of coins in your possession, the third section should list the buy price, the fourth one the sell prices, and the fifth section shows the dates of your trading deals.
This way, you’ll be able to have an overview of all of your crypto trades and easily calculate your profits or losses by implementing the subtraction calculation model described in this guide. You can either make your own spreadsheet or find various free online spreadsheets specialized for tracking crypto portfolios.
A Few Ending Words…
When crypto beginners hear about crypto profit calculations, they might think that this involves some complex math calculations, but it’s actually quite straightforward, as shown in this article. Calculating your crypto gains and losses will definitely save you from a lot of uncertainty and unnecessary stress, which is often associated with crypto trading when brokers don’t have a clear strategy and don’t keep records of their trading deals.