Unrealized or Realized and Profit or Loss
Realized is just a fancy word for sold. Some people also say “booked”, which is another synonym for realized.
In the field of investing accounting, we use terms unrealized and realized quite often. After we buy a certain asset (e.g. crypto coin), its value (or price) goes up and down. We end up with the following four scenarios:
- If we hold an asset and its current price is higher than the price we paid for, we call that “unrealized profit”
- If we hold an asset and its current price is lower than the price we paid for, we call that “unrealized loss”
- If we sold an asset for a price higher than the price we bought it for, we call that “realized profit”
- If we sold an asset for a price lower than the price we bought it for, we call that “realized loss”
So you see, unrealized goes along with holding an asset (you haven’t sold it yet). Realized is associated with a sale of an asset (therefore, you don’t have it any more).
Quite obviously, profit is associated with a higher price, while loss is associated with a lower price*.
* Just note that price statements above hold true with normal (long) investing. The opposite is true in shorting, but that is not the focus of this post, especially not when we talk about crypto investing
Fear of Loss and Excitement of Profit
The volatility in crypto space is exceptionally high. That means that price gyrations are significant, much more than your ordinary stock portfolio, let alone some mutual fund or an index fund. The volatility of cryptos is both blessing and a curse. Watching your crypto portfolio is often gut wrenching.
Thus is takes some (actually a lot of) emotional discipline to be a successful crypto investor.
The price of your crypto position can easily drop 50% (halve). On the other hand, the price can also double in no time. Both of these scenarios will trigger plenty of emotions and you will be tempted to sell your position.
Now, selling a position as a part of executing your trading plan is one thing, but selling because of fear (price 50% down) or anxiety (price 100% up) is an emotional decision and should almost never be done.
Once you sell, you are out of your crypto position and you do not participate in price moves any more. While you may be relieved to sell at a loss to end agony of fear, you will also end the ability to recover from the loss. It is important to stay in the game!
Thus, no matter whether in profit or loss, do not sell because of your emotions. Trade according to your investing plan (which assumes you have one to begin with). If you are down on your position, so be it, the loss is not realized unless you sell. Stay invested and be patient – the price often turns around and your position turns into a profit. Don’t think of a loss while holding your position. Loss is only if you sell your position, i.e. if you realize it.
Similarly, if your position is up in a nice profit and your trading plan says you should sell it, don’t be greedy! Price can turn around and go south quickly while your profit fizzles away. Remember, it is not a profit unless you realize it, book it, capture it…
Thus, be smart: don’t realize your losses, do realize your profits, trade according to your investing plan, leave emotions aside.