Drawdown

Drawdown tracks how far an asset or portfolio has fallen from its most recent peak, expressed as a percentage of that high point. It is always measured relative to the highest value reached before a decline began, then reset once a new peak forms.

Analysts distinguish between a running drawdown, which changes continuously as prices move, and maximum drawdown (MDD), the single largest peak-to-trough decline recorded over a chosen period. MDD is calculated as (trough value minus peak value) divided by peak value. A trader whose portfolio peaked at $50,000 and fell to $20,000 before recovering would report a maximum drawdown of 60%, regardless of how the portfolio performed afterward.

In crypto, drawdown carries extra weight because cycles tend to be violent. Bitcoin has historically fallen 70 to 85 percent from cycle highs during bear markets, with recoveries to a new all-time high sometimes taking well over a year. Because of this, drawdown is often studied alongside volatility and recovery time to judge whether a strategy or fund is actually sustainable, not just profitable on paper. Risk-adjusted metrics such as the Calmar ratio divide annualized return by maximum drawdown so strategies can be compared on equal footing.

Fund managers and exchanges publish maximum drawdown figures to help investors gauge worst-case exposure before committing capital, since an average return says little about whether an investor could have withstood the deepest correction along the way.