What is Unrealized Profit & Loss?
Let's find out Unrealized Profit & Loss meaning, definition in crypto, what is Unrealized Profit & Loss, and all other detailed facts.
Unrealized profit and loss (also known as “paper” profit and loss) are theoretical profits or losses that you only have on “paper" because you still hold the investment.
The calculation of unrealized profit and loss can be used to determine the value of the investments that are still on hold. It is an unrealized profit if the value exceeds the original purchase price. Unrealized loss, on the other hand, occurs when the current worth of an asset is lower than the initial acquisition price.
As an example, let’s assume that an investor pays $50 per share for 100 shares of company X (this would be a $5,000 investment). Then, let’s assume that the stock has increased in value to $100 per share after being held for ten years. This investment's unrealized profit would be:
100 shares x ($100 - $50) = $5,000 unrealized profit
It's an unrealized profit because the position is still open and it hasn’t been “realized” yet.
Let’s take another example. If you bought USD at 1.2510 and it is now trading at 1.2600, the transaction has profited you 90 pips (1.2510 - 1.2600 = -0.0090 = 90 pips). However, since you haven't closed the trade yet, this profit is unrealized, and it could turn into a loss if the market swings against you and you decide to terminate the trade at a lower price (1.2600 - 1.2700 = -0.0100 = 100 pips loss).
As part of the mark-to-market accounting process, unrealized profit and losses are routinely monitored because trading requires constant attention. This is especially true for day traders, who try to trade as much as possible during market opening hours (or even after hours). Therefore, when you trade a lot, it’s normal that some of your trades will be profitable, while the others – unprofitable.
Your realized profit and loss (or P&L) is calculated by keeping track of how much money you make on each deal. You can, however, keep track of your unrealized profit and loss as well.
Though traders pay closer attention to their realized P&L since it shows real profit or loss that can be utilized for tax purposes or future reinvestment in trades. Besides, unrealized P&L does not affect taxes or account balances. Either way, a seasonal investor or trader never assumes that it is not important.