You Are Not Mistaken About the Bookkeeping Profit and Loss, You Just Misunderstood the Game Rules Behind Perpetual Contracts

The profit and loss calculation of perpetual contracts is far more complex than it appears on the surface. This article delves into mechanisms such as the mark price, funding rate, and liquidation, revealing that traders who seem to be profitable may actually be at high risk, and uncovering the hidden liquidation traps behind unrealized losses. (Background: Ten bets, ten losses? Deconstructing the 'fate' of perpetual contract risks and the 'invincible' path of exchanges) (Context: When will smart contracts replace ETF funds? The rise and concerns of tokenized stocks) The profit and loss algorithm of perpetual contracts has never been as simple as it seems on the exchange interface. It involves a multi-variable game: funding rate, mark price, liquidation mechanism, and the display logic of unrealized profit and loss. Users may mistakenly believe they are 'holding profits', but in reality, they may be in a high-risk zone. What you think is a 'small floating loss' is just the liquidation model being activated but not yet executed. We attempt to analyze the principles and psychological impact of floating profit and loss calculations, trying to clarify: what is the true basis for determining profit and loss, and where are the traps in the algorithm? Reading Guide If you have any of the following questions, it is recommended to start reading from Chapter 1; Do you know that perpetual contracts are divided into forward and inverse contracts? If you have any of the following questions, it is recommended to start reading from Chapter 2: Why does my position appear to be profitable, but after closing, the profit is not as much as displayed on the front end? Even after adding transaction fees and funding fees, I still lost money? When I opened the position, the margin was enough to support a 10% fluctuation. But three days later, a 5% fluctuation caused me to be liquidated? If you do not have the above questions, please like and share this article before leaving. Chapter 1: Profit and Loss Calculation Mechanism Perpetual contracts are the most popular tools in the cryptocurrency derivatives market, allowing traders to speculate on asset prices without an expiration date. Understanding how profit and loss (PnL) is calculated is the cornerstone of successful trading. The logic of profit and loss calculation varies by contract type, mainly divided into two categories: U-based (forward contracts) and coin-based (inverse contracts). 1.1 U-based (Forward) Contracts: Standard Linear Model U-based contracts, also known as forward contracts, use stablecoins (such as USDT or USDC) as margin and settlement currency. Its intuitive and linear profit and loss calculation method makes it a mainstream choice. Currently, most major exchanges (such as Binance and Bybit) primarily offer U-based contracts. Its intuitive profit and loss structure and ease of automated fund management make it a popular choice for retail and institutional investors. 1.1.1 Unrealized Profit and Loss (Unrealized PnL) Unrealized profit and loss refers to the floating profit and loss during the holding period, which is a core indicator used by exchanges to assess liquidation risk. Key Element – Mark Price: Unrealized profit and loss is calculated based on the mark price, not the latest transaction price. The mark price is a composite index intended to reflect the 'true' fair value of the asset, smoothing short-term price fluctuations and preventing market manipulation. It is usually composed of the index price (the weighted average of prices from major spot exchanges) and the funding rate basis to prevent unnecessary liquidations due to price fluctuations of a single exchange. Calculation Formula: Long Position Unrealized Profit and Loss = (Mark Price – Average Opening Price) × Position Size Short Position Unrealized Profit and Loss = (Average Opening Price – Mark Price) × Position Size Note: The unrealized profit and loss displayed on the trading panel usually differs from the actual settlement at closing. This is due to the difference between the execution price (latest transaction price) and the mark price used for risk calculation. This difference may cause a 'psychological gap'. 1.1.2 Realized Profit and Loss (Realized PnL) Realized profit and loss is the final locked profit and loss after closing the position. It includes all costs incurred during the trade. Calculation Formula: Realized Profit and Loss = (Closing Price – Average Opening Price) × Closing Size – Transaction Fees – Funding Costs incurred during the holding period Key Variable – Notional Value: A core trap for traders is confusing margin with notional value. The notional value of a contract is the total value of the position, calculated as price x quantity. Transaction fees and funding costs are calculated based on the notional value of the position, not the amount of margin. For example, a trader uses $100 margin to open a long position with 100x leverage, controlling a position with a notional value of $10,000. If the taker fee is 0.06%, then the trader's opening fee is not 0.06% of the margin (i.e., $0.06), but rather 0.06% of the notional value, which is $10,000 * 0.0006 = $6. Similarly, a 0.01% funding rate is not $0.01, but rather $10,000 * 0.0001 = $1. This shows that high leverage greatly amplifies the erosion of various costs on the trader's actual margin. Even in a sideways market, this ongoing 'chronic blood loss' significantly increases the risk of liquidation. 1.2 Coin-based (Inverse) Contracts: Non-linear Return Structure Coin-based contracts, also known as inverse contracts, use the cryptocurrency being traded (such as BTC or ETH) as margin and settlement currency. The profit and loss calculation for this type of contract is non-linear, as the value of the margin itself fluctuates with market prices. Profit and Loss Calculation: The profit and loss formula is based on the contract amount (usually denominated in dollars, such as $1 or $100 per contract) and the inverse of the price. This structure is also known as 'non-linear inverse contracts'. Calculation Formula: Long Position Profit and Loss (in coins) = (Closing Price – Opening Price) * Position Size – Fees Short Position Profit and Loss (in coins) = (Opening Price – Closing Price) * Position Size – Fees Asymmetric Risk Analysis: This non-linear return structure creates asymmetric risk exposure for traders, which is a key but often overlooked trap. When traders go long on BTC/USD inverse contracts, as the price of BTC rises, their profit denominated in BTC becomes more valuable when converted to dollars, forming a convex and accelerating profit curve. Conversely, when the price of BTC falls, although the loss denominated in BTC increases in quantity, the BTC itself as margin is also depreciating. This dual effect means that for long positions, a 10% drop in market price will result in a dollar value loss exceeding 10%, triggering liquidation faster than linear contracts. For short positions, the situation is reversed: a 10% price increase results in a dollar loss smaller than 10%, making the risk of liquidation relatively low. This inherent convexity is the main risk for long traders in bear markets, but also a structural advantage for long-term holders accumulating the underlying assets in bull markets. This is why it is also known as 'hoarding contract'. Chapter 2: Visible Profits, Invisible Losses – The Hidden Risks of Perpetual Contracts We will take the common forward contract as an example. In addition to basic profit and loss calculations, trading perpetual contracts also involves many hidden costs and risks, which are the main reasons for unexpected losses for traders. ...