Drawdown

Drawdown is measured from the highest value reached to the lowest point before a new high. If a portfolio grows to 10,000 dollars, falls to 7,000 and then recovers, it suffered a 30% drawdown. Maximum drawdown is the largest such fall over a given period and is a standard figure in fund reports and backtests, alongside how long recovery took.

Crypto has produced some of the deepest drawdowns of any widely traded asset class. Bitcoin has fallen roughly 75% to more than 80% from its peak in several bear markets, and many altcoins have dropped 90% or more without ever recovering. Losses compound asymmetrically: after a 50% fall, a 100% gain is needed to get back to even, and after 90%, a tenfold gain.

For traders, drawdown limits are a key part of risk management, such as reducing size or stopping after a 10% account decline. A strategy's historical maximum drawdown is also a reminder that future ones can be deeper.