Many traders, despite seemingly controlled operations, end up suffering unnecessary losses—or even liquidation—due to insufficient understanding of mark price mechanisms, funding fee accumulation, liquidation logic, and Auto-Deleveraging (ADL) systems.

The P&L algorithm of perpetual contracts is never as simple as what you see on the exchange interface.

It hides a game of multiple variables:

• Funding rates

• Mark price vs. last traded price

• Liquidation mechanisms

• Unrealized P&L display logic

You might think you're "holding profits," but in reality, you could already be in a high-risk zone. Or you believe you're experiencing "minor floating losses," but the liquidation model has already kicked in—it just hasn't executed yet.

This article examines the psychological impact of unrealized P&L calculations and reveals:

• What truly determines your profit or loss?

• Where do the algorithmic traps lie?

Start with Chapter 1 if you:

• Aren’t sure about the difference between linear (USDT-margined) and inverse (coin-margined) perpetual contracts.

Jump to Chapter 2 if you:

• Have seen your position show a profit, but after closing, the realized P&L was smaller than displayed (or even negative after fees).

• Opened a position with enough margin to withstand a 10% move, but got liquidated after just a 5% swing days later.

If neither applies to you: Like, share, and exit gracefully. 🤣

Perpetual contracts, the most popular crypto derivatives, allow traders to speculate on asset prices without expiry dates. Understanding their Profit & Loss (PnL) calculations is critical.

These use stablecoins (e.g., USDT) as margin and settlement. PnL is straightforward and linear—the dominant choice on exchanges like Binance and Bybit.

• Calculated using mark price (not last traded price).

• Mark price = Index price (weighted average across major spot exchanges) + funding rate basis.

Formulas:

• Long PnL = (Mark Price − Avg Entry Price) × Position Size

• Short PnL = (Avg Entry Price − Mark Price) × Position Size

Psychological Trap: The PnL displayed often differs from actual closing value due to execution price vs. mark price divergence.

• Final locked-in P&L after closing, including all costs.

Formula:
Realized P&L = (Exit Price − Entry Price) × Position Size − Trading Fees − Funding Fees

Key Trap: Fees are calculated on notional value (position size × price), not margin.

• Example: 100x leverage on $100 margin → $10,000 notional value.

• A 0.06% taker fee = $6 (not $0.06).

• A 0.01% funding fee (every 8hrs) = $1 per interval.

Result: High leverage + sideways markets = slow bleed of margin.

These use the traded crypto (e.g., BTC) as margin, creating nonlinear P&L dynamics.

Key Feature:

• Long positions suffer accelerated losses in downtrends (double whammy: BTC price drop + collateral value decline).

• Short positions see slower USD losses in rallies (convex payoff).

Why? Your collateral’s value fluctuates with the asset price.

• Liquidation uses mark price; your orders execute at last price.

• Scenario 1: A "wick" in last price triggers your stop-loss, but mark price stays stable → unnecessary exit.

• Scenario 2: Your exchange’s price looks stable, but mark price (based on other exchanges) drops → sudden liquidation.

Lesson: Always monitor mark price—it’s your real liquidation line.

• Charged every 8 hours based on notional value.

• Example: 50x leverage, 0.01% fee → Daily cost = 0.03% of position size.

  • Over 10 days: 0.3% of notional value → 15% of margin eroded (0.3% × 50x).

Result: High leverage + low volatility = slow-margin bleed.

• Liquidations trigger market orders, eating order book depth.

• Domino effect: One liquidation → slippage → more liquidations → death spiral.

• May 19, 20xx Crash: Stop-loss at $38,000? Too bad—executed at $34,500 due to slippage.

Defense: Use limit stops and trade on high-liquidity platforms.

• When insurance funds dry up, the exchange force-closes profitable positions to cover bankrupt traders.

• Example: You short LUNA from $20 to $1 (95% profit), but ADL closes you at $2.50.

• Outcome: Profits slashed, no chance to re-enter.

Lesson: Even winning trades can be hijacked by the system.

1. Mark price > Last price for liquidation risk.

2. Funding fees compound silently—avoid high leverage in choppy markets.

3. Liquidation cascades amplify losses—trade on deep-order-book exchanges.

4. ADL can steal your profits—diversify across platforms.

Final Warning: Perpetual contracts are algorithmic minefields. What you see isn’t always what you get. Trade wisely.

Many traders, despite seemingly controlled operations, end up suffering unnecessary losses—or even liquidation—due to insufficient understanding of mark price mechanisms, funding fee accumulation, liquidation logic, and Auto-Deleveraging (ADL) systems.

The P&L algorithm of perpetual contracts is never as simple as what you see on the exchange interface.

It hides a game of multiple variables:

• Funding rates

• Mark price vs. last traded price

• Liquidation mechanisms

• Unrealized P&L display logic

You might think you're "holding profits," but in reality, you could already be in a high-risk zone. Or you believe you're experiencing "minor floating losses," but the liquidation model has already kicked in—it just hasn't executed yet.

This article examines the psychological impact of unrealized P&L calculations and reveals:

• What truly determines your profit or loss?

• Where do the algorithmic traps lie?

Start with Chapter 1 if you:

• Aren’t sure about the difference between linear (USDT-margined) and inverse (coin-margined) perpetual contracts.

Jump to Chapter 2 if you:

• Have seen your position show a profit, but after closing, the realized P&L was smaller than displayed (or even negative after fees).

• Opened a position with enough margin to withstand a 10% move, but got liquidated after just a 5% swing days later.

If neither applies to you: Like, share, and exit gracefully. 🤣

Perpetual contracts, the most popular crypto derivatives, allow traders to speculate on asset prices without expiry dates. Understanding their Profit & Loss (PnL) calculations is critical.

These use stablecoins (e.g., USDT) as margin and settlement. PnL is straightforward and linear—the dominant choice on exchanges like Binance and Bybit.

• Calculated using mark price (not last traded price).

• Mark price = Index price (weighted average across major spot exchanges) + funding rate basis.

Formulas:

• Long PnL = (Mark Price − Avg Entry Price) × Position Size

• Short PnL = (Avg Entry Price − Mark Price) × Position Size

Psychological Trap: The PnL displayed often differs from actual closing value due to execution price vs. mark price divergence.

• Final locked-in P&L after closing, including all costs.

Formula:
Realized P&L = (Exit Price − Entry Price) × Position Size − Trading Fees − Funding Fees

Key Trap: Fees are calculated on notional value (position size × price), not margin.

• Example: 100x leverage on $100 margin → $10,000 notional value.

• A 0.06% taker fee = $6 (not $0.06).

• A 0.01% funding fee (every 8hrs) = $1 per interval.

Result: High leverage + sideways markets = slow bleed of margin.

These use the traded crypto (e.g., BTC) as margin, creating nonlinear P&L dynamics.

Key Feature:

• Long positions suffer accelerated losses in downtrends (double whammy: BTC price drop + collateral value decline).

• Short positions see slower USD losses in rallies (convex payoff).

Why? Your collateral’s value fluctuates with the asset price.

• Liquidation uses mark price; your orders execute at last price.

• Scenario 1: A "wick" in last price triggers your stop-loss, but mark price stays stable → unnecessary exit.

• Scenario 2: Your exchange’s price looks stable, but mark price (based on other exchanges) drops → sudden liquidation.

Lesson: Always monitor mark price—it’s your real liquidation line.

• Charged every 8 hours based on notional value.

• Example: 50x leverage, 0.01% fee → Daily cost = 0.03% of position size.

  • Over 10 days: 0.3% of notional value → 15% of margin eroded (0.3% × 50x).

Result: High leverage + low volatility = slow-margin bleed.

• Liquidations trigger market orders, eating order book depth.

• Domino effect: One liquidation → slippage → more liquidations → death spiral.

• May 19, 20xx Crash: Stop-loss at $38,000? Too bad—executed at $34,500 due to slippage.

Defense: Use limit stops and trade on high-liquidity platforms.

• When insurance funds dry up, the exchange force-closes profitable positions to cover bankrupt traders.

• Example: You short LUNA from $20 to $1 (95% profit), but ADL closes you at $2.50.

• Outcome: Profits slashed, no chance to re-enter.

Lesson: Even winning trades can be hijacked by the system.

1. Mark price > Last price for liquidation risk.

2. Funding fees compound silently—avoid high leverage in choppy markets.

3. Liquidation cascades amplify losses—trade on deep-order-book exchanges.

4. ADL can steal your profits—diversify across platforms.

Final Warning: Perpetual contracts are algorithmic minefields. What you see isn’t always what you get. Trade wisely.