A drawdown (or peak-to-trough decline) is the drop in an asset’s price from its most recent peak to its lowest point before a recovery, usually expressed as a percentage.
Drawdown
What is a Drawdown?
A drawdown (or peak-to-trough decline) is the drop in an asset’s price from its most recent peak to its lowest point before a recovery, usually expressed as a percentage.
For example, a 50% drawdown means the asset has fallen 50% from its recent high.
How is Drawdown used?
Drawdown is used to measure downside risk and loss over a period of time.
It helps with:
- Assessing how much an investment can fall
- Comparing risk between different assets
- Understanding the depth and duration of losses
What are common examples of Drawdown?
Examples include:
- A stock falling from 100 to 70 represents a 30% drawdown
- Market-wide declines during financial crises
- Prolonged periods where prices remain below previous highs
Drawdowns can vary in size and duration depending on market conditions.
How does Drawdown apply to crypto?
Drawdowns are a key feature of crypto markets due to higher volatility.
Examples include:
- Bitcoin experiencing large percentage declines during market cycles
- Altcoins often showing deeper drawdowns than larger assets
- Sharp corrections following rapid price increases
Why is Drawdown important?
Drawdown helps explain how much an asset can lose from its peak. It is a core metric for understanding risk, especially in volatile markets like crypto.
