In the dynamic world of cryptocurrency trading, understanding key concepts like unrealized Profit and Loss (PnL) and its settlement is crucial for effective portfolio management. This guide breaks down these essential mechanisms, helping you navigate your trading journey with greater confidence.
What is Unrealized PnL?
Unrealized PnL represents the current profit or loss on an open position that has not yet been closed. It fluctuates with the market price of the asset. This figure is "unrealized" because the position is still active, and the gain or loss is not locked in until the trade is settled or the position is closed.
For instance, if you buy a Bitcoin futures contract and the price of Bitcoin increases, your unrealized PnL becomes positive. Conversely, if the price drops, it turns negative. It's a snapshot of your paper gains or losses at any given moment.
The Daily Settlement Process
Many trading platforms, especially those offering futures and perpetual swaps, have a daily settlement cycle. A common practice is settling all open positions at a specific time each day, such as 4:00 PM UTC.
During this process:
- The system automatically calculates the unrealized PnL for all relevant open positions.
- This calculated amount is then transferred from "unrealized PnL" to "realized PnL".
- Your account balance is adjusted accordingly, effectively resetting the unrealized PnL for those positions to zero while updating your cash balance.
This mechanism is particularly applied to positions in futures contracts with specific expiry dates, such as next-week, quarterly, or next-quarter contracts.
Why Does Daily Settlement Occur?
Daily settlement helps manage risk for both the trader and the exchange. It ensures that profits and losses are regularly recognized, maintaining market stability and providing a clear, daily update on your actualized financial performance.
Key Price Mechanisms in Futures Trading
To accurately calculate PnL, exchanges use specific price types to avoid manipulation and ensure fairness.
Mark Price
The Mark Price is used to calculate unrealized PnL and to avoid unnecessary liquidations during periods of high volatility. It is not simply the last traded price.
It is typically derived from a formula:Mark Price = Spot Index Price + Moving Average of Basis
Spot Index Price: A composite price aggregated from several major spot markets to provide a robust and fair reference price.
Basis: The difference between the futures contract price and the spot index price.
The moving average of the basis smooths out short-term fluctuations, creating a more stable and reliable price for calculating your equity.
Last Traded Price vs. Mark Price
While the last traded price is the price of the most recent transaction, the mark price is a calculated value designed for stability. Your unrealized PnL is based on the mark price, not the last traded price, protecting you from illiquid or highly volatile market conditions.
Exploring Different Crypto Trading Products
Beyond futures, the crypto ecosystem offers a variety of trading instruments.
Spot Trading
Spot trading, also known as coin-to-coin trading, involves the direct exchange of one cryptocurrency for another at current market prices. It's the most straightforward form of trading. Popular trading pairs often involve stablecoins like USDT or USDC, or major cryptocurrencies like BTC, ETH, or OKB acting as the base currency.
Options Trading
Options contracts give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price on or before a certain date. Platforms often offer both simplified and professional interfaces for options trading, catering to different levels of user experience. 👉 Discover advanced trading strategies
Other Market Concepts
The market often groups assets based on common themes. For example, "grayscale concept coins" refer to digital assets that are held by Grayscale Investments' famous trust products. Exchanges sometimes create dedicated sections for traders interested in these thematic baskets.
Frequently Asked Questions
What happens to my position after daily settlement?
Your position remains open after settlement. Only the unrealized PnL is converted to realized PnL and added to (or subtracted from) your account balance. The position itself continues until you decide to close it or it reaches its expiry date.
Why is my unrealized PnL different from what I expect?
This is most often because PnL is calculated using the Mark Price, not the Last Traded price. Check the platform's specifications to see how they calculate the mark and index prices for the specific contract you are trading.
Is daily settlement the same as liquidation?
No, they are completely different. Settlement is a routine accounting process that locks in daily gains/losses. Liquidation is a forced closure of a position that occurs when your margin balance falls below the maintenance margin requirement, leading to a total loss of your initial margin.
Do all crypto contracts undergo daily settlement?
No. Perpetual swaps, for example, do not have an expiry date and typically use a funding rate mechanism instead of a daily settlement. Always check the specific rules of the contract you are trading.
Can I avoid daily settlement?
If your trading strategy is impacted by the daily cash flow from settlement, you might consider using perpetual swap contracts which use a funding rate mechanism instead of daily settlement.
Where can I see my realized and unrealized PnL?
All major trading platforms clearly display both realized and unrealized PnL in their user interface, usually within the "Positions" or "Assets" section of your account.
Understanding the cycle of unrealized and realized PnL, along with the settlement process, is a fundamental aspect of risk management in crypto trading. By knowing how these values are calculated and when they are converted, you can make more informed decisions and better manage your trading capital.