What a drawdown is
A drawdown is the fall in value from a previous high to a later low, usually expressed as a percentage of that high. The high point is the peak, the low point is the trough, and the drawdown is how far the value dropped between them. A drawdown lasts until the price climbs back to the old peak, at which point it is said to have recovered.
While volatility describes how widely prices scatter in general, a drawdown describes something more personal: how much a holder who bought near the top would have seen disappear on paper. Many people find it a more intuitive measure of risk than a standard deviation figure.
A worked example
The numbers below are invented for illustration. Suppose a price moves like this: 100, then 150, then 90, then 120.
- The first peak is 100, and it rises to a new peak of 150.
- It then falls to 90. The drawdown from the 150 peak is (150 - 90) / 150 = 0.4, or 40 percent.
- It then recovers to 120, which is still below 150. The drawdown is still active, now at (150 - 120) / 150 = 20 percent.
The maximum drawdown is the largest such fall over the whole period. Here it is 40 percent. To find it in a longer series, you track the highest price seen so far at each point, compute the percentage fall from that running high, and take the worst value.
Two related ideas often accompany it. Drawdown duration is the time spent below a previous peak, and recovery time is the time taken to climb back to it. A shallow drawdown that lasts years can be as uncomfortable as a deep one that heals fast.
Why recoveries take larger gains
Percentages are not symmetric. Losing 50 percent of a value leaves half of it, and getting back to the start needs that half to double, a gain of 100 percent. Using the example above, the price fell from 150 to 90, and returning to 150 requires a rise of (150 - 90) / 90, which is about 66.7 percent, not 40 percent.
The deeper the drawdown, the more lopsided this becomes. A 20 percent fall needs a 25 percent gain to recover. A 75 percent fall needs a 300 percent gain. This arithmetic is a main reason why avoiding very large losses matters so much to people who study risk.
Drawdown versus other measures
Maximum drawdown is a backward-looking description of one path the price took. It has strengths and weaknesses.
- It focuses on losses, unlike standard deviation, which counts upward and downward moves alike.
- It depends heavily on the period chosen. A window that starts after a crash will show a much smaller number than one that includes it.
- It describes only the worst event so far. A worse one may still lie ahead.
- It depends on the price data used. Using daily closing prices can miss deeper intraday lows.
Because the biggest historical fall is one data point, it is usually viewed together with the full picture of how often and how deeply prices have fallen.
Large declines in crypto history
Bitcoin has gone through several large drawdowns. The figures below are approximate and are given to show scale, not as precise records.
- After the 2017 peak, close to $20,000, the price fell during 2018 to somewhere around $3,000 to $3,500, a decline of more than 80 percent.
- After the late-2021 peak, in the region of $69,000, the price fell during 2022 to roughly $15,000 to $16,000, a decline of roughly three-quarters.
- Earlier cycles, such as the declines that followed the 2013 and 2011 peaks, were also severe, on the order of 80 percent or more by most accounts.
Each of these followed a long run-up, and each took considerable time to recover. Many smaller coins fell by more and a number never returned to their earlier highs. Some disappeared entirely. Reported drawdowns for any given coin vary with the data source, so it is worth checking figures yourself before relying on them. The broader pattern of rise and fall across the years is part of what people call market cycles.
Drawdowns are also not limited to price peaks. Specific events, such as exchange failures or stablecoin troubles, have produced sudden falls within longer declines.
Using drawdown thinking
Drawdown is a useful way of asking, “How much could I stomach losing?” before taking on a position. It links directly to ideas like position sizing and general risk management: the same price fall hurts less if the position is small, and it can be devastating if the position was bought with borrowed money. Margin trading can turn a drawdown into a total loss, because positions may be closed automatically before a price has the chance to recover.
It also helps with the emotional side. Drawdowns test patience and judgment, and many people sell near the lows. The history above shows that falls of this size have happened more than once, but it does not tell us when the next will come or whether any asset will recover.
Limits
Past drawdowns do not set a ceiling on future ones. Cryptocurrency prices are volatile, recoveries are not guaranteed, and you can lose everything you invest. This article is educational and is not financial, tax or legal advice.