What is Drawdown?
Let's find out Drawdown meaning, definition in crypto, what is Drawdown, and all other detailed facts.
Usually, “drawdown” is used to refer to an investment's maximum loss in value from its peak value over a period of time. Drawdown can help you determine how risky a particular investment or fund is and whether it is suitable for you. The riskier the fund is, the bigger the possibility for value loss. Therefore, you can choose a fund with fewer drawdowns if you are worried about volatility and want a steadier investment ride.
Drawdown can also be used in trading for things like:
- Describing the difference between the balance and the equity at any given time.
- Seeing how stable a trading strategy or model is over time.
- Estimating how much equity capital would be needed to avoid drawdowns below certain levels.
How Is the Maximum Drawdown Calculated?
The maximum drawdown (MDD) formula:
​​MDD = (Trough Value — Peak Value) / Peak Value
The maximum drawdown can be calculated in two ways. If you want to know your maximum loss on a daily basis, you should compare daily trading prices. However, if you are more interested in long-term returns, you should compare monthly account balances.
Talking about the actual calculation process, finding the largest peak in your equity curve is the starting point for determining the MDD. After you've determined where your equity curve's highest peak is, you'll need to determine where its lowest point is. The MDD is calculated by dividing the difference between these two values by the highest point.
For instance, if account equity reaches $10,000 following a trade entry, drops to $9,500, and then rises to $10,500 later, you have a $500 (or 5%) drawdown. Note that many traders consider a lower MDD to be important because it signifies less risk.
However, while the rate of return on investment is important, it doesn't tell the whole story when it comes to risk. An investment could have a high rate of return but its value could still drop dramatically before increasing again. Investors would be subjected to increased volatility and more inclined to sell at a loss. The drawdown gives additional information to investors to help them understand how much money they would potentially lose on a specific investment.
Besides, the maximum drawdown is often used to estimate risk in a securities portfolio. A higher MDD suggests a higher risk level, while a lower MDD indicates a lower risk level.
Let’s say that an investment fund has an average return of 10% but a maximum drawdown of -20%. It suggests that there were periods when investors might have lost 20% of their investment if they had bought at the top and sold at the bottom, even if the average annual return was good.
The SEC’s Framework for “Investment Contract” Analysis of Digital Assets has established a way to register tokens of blockchain projects as securities. The framework provides conditions of compliance for the projects to ensure they adhere to the regulations.<\/p>\n<p>If a project wants the token to be considered as a security, it must ensure that the asset offers real-world utility and profit for the investors and token holders. Furthermore, the project must be completely <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralization/">decentralized. The SEC will only consider tokens as securities if they meet these requirements.<\/p>\n<p>The two-token economy model also allows projects to incentivize the investors and token holders. They may offer more perks than their competitors. The dual-token model helps ensure better features, functionalities, and upgrades for the end-users.<\/p>\n<p>Some of the projects that utilize the dual-token economy system include <strong>MakerDAO<\/strong>, Centric, and Anchor. One of the best-known two-token systems is the Ethereum-based <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-non-fungible-token-nft/">NFT gaming project Axie Infinity. The project relies on two tokens - <strong>SLP<\/strong> and AXS.<\/p>\n<p>The SLP token, which stands for Small Love Potion, acts as the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-utility-token/">utility token<\/strong><\/a>. It allows players to complete in-game activities. Using SLP, they can purchase or breed Axies, the in-game pets.<\/p>\n<p>AXS is the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-governance-token/">governance token<\/strong><\/a> with a <strong>capped supply<\/strong> of 27 million. It provides both players and investors with the ability to buy or trade the tokens on crypto exchange platforms. The AXS token also allows holders to participate in in-game governance. Holders are able to <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-staking/">stake the tokens on the platform which yields them passive rewards.<\/p>","definition":"a crypto project that utilizes two tokens. One token is used to fulfill certain activities within the blockchain network. The other token serves as a security to raise funds for the project.","status":"published","meta_title":"What is Dual-Token Model (Two-Token Economy)? Definition & Meaning | Crypto Wiki","meta_description":"Dual-Token Model (Two-Token Economy) meaning: Dual-Token Model (Two-Token Economy) - a crypto project that utilizes two tokens. One token is used to fulfill certain activities within the blockchain network. The other token serves as a security to raise funds for the project.","meta_keywords":null}"
:prev-section="{"id":302,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Double-spending","level":"medium","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2024-01-06T15:41:17.000000Z","slug":"what-is-double-spending","title":"What is Double-Spending?","section":"D","keyword":"Double-Spending","content":"<p><strong>Double-spending is about the simplicity of the process in which information can be duplicated and the increasing accessibility of the computing power required to perform.<\/strong><\/p>\n<p>When digital currencies initially debuted, this was one of the key worries. The very first tests were undertaken in the 1980s, but they never acquired any popularity, owing to the double-spending dilemma.<\/p>\n<p>To be more specific, in order for someone to double-spend, <strong>a hidden block that outperforms the construction of the main blockchain must be <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-mining/">mined. <\/strong>They'd have to showcase that chain to the network before it caught up. If they did, the network would identify it as the most recent set of blocks and include it in the chain.<\/p>\n<p>As a result, the individual who did this might then return whatever cryptocurrency they had spent and utilize it again.<\/p>\n<p>This double-spending scenario can happen in a cryptocurrency when it is inferred by malicious individuals. Typically, fraudsters send several packets connected to a transaction to the currency’s network, but then reverse that transaction with the aim of making it seem as if it never happened.<\/p>\n<p><strong>Speaking of <a href=https://www.bitdegree.org/"//crypto//buy-bitcoin-btc/">Bitcoin, it is currently seen as having solved the double-spending issue.<\/strong> It makes it possible by recording all transactions on the blockchain. These records are, in fact, permanent. This is because each new block mined is required to have references to previous blocks.<\/p>\n<p>Since the blockchain is distributed throughout several computers and places, the computing power needed to generate a single adjustment to the ledger is so high that it is seen as an unachievable task.<\/p>\n<p>Nonetheless, Bitcoin had faced some difficulties regarding its steadiness. <strong>In several scenarios, malicious actors have tried to double-spend utilizing the sheer weight of computing power. <\/strong>In other scenarios, Bitcoin fraudsters have utilized other methods to capture cryptocurrency from poorly secured <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-wallet/">wallets./n This is the most common type of stealing that is now taking place on the Bitcoin blockchain, as well as in the broader crypto industry.<\/p>\n<p>In addition, numerous attack variants might enable malicious miners to double spend. <strong>The Finney attack, the unvalidated transaction attack, race attack, <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-51-attack/">51% attack<\/a>, and the career attack are all featured.<\/strong><\/p>","definition":"is a problem regarding virtual currencies.","status":"published","meta_title":"What is Double-Spending? Definition & Meaning | Crypto Wiki","meta_description":"Double-Spending meaning: Double-Spending - is a problem regarding virtual currencies.","meta_keywords":null}"
:model="{"id":858,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Drawdown_(economics)","level":"medium","author_id":1,"created_at":"2023-06-19T06:59:01.000000Z","updated_at":"2024-01-06T15:44:13.000000Z","slug":"what-is-drawdown","title":"What is Drawdown?","section":"D","keyword":"Drawdown","content":"<p>Usually, “drawdown” is used to refer to an investment's maximum loss in value from its peak value over a period of time. Drawdown can help you determine how risky a particular investment or fund is and whether it is suitable for you. The <strong>riskier<\/strong> the fund is, the bigger the possibility for value loss. Therefore, you can choose a fund with fewer drawdowns if you are worried about <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-volatility/">volatility and want a steadier investment ride.<\/p>\n<p>Drawdown can also be used in trading for things like:<\/p>\n<ul>\n<li><strong>Describing the difference<\/strong> between the balance and the equity at any given time. <\/li>\n<li>Seeing how stable <strong>a<\/strong> trading strategy or model is over time. <\/li>\n<li>Estimating how much equity capital would be needed to avoid drawdowns below certain levels.<\/li>\n<\/ul>\n<h3>How Is the Maximum Drawdown Calculated?<\/h3>\n<p>The maximum drawdown (MDD) formula:<\/p>\n<p>\u200b\u200b<span style=\"color: #ba372a;\"><strong>MDD = (Trough Value — Peak Value) \/ Peak Value<\/strong><\/span><\/p>\n<p>The maximum drawdown can be calculated in two ways. If you want to know your maximum loss on a daily basis, you should compare daily trading prices. However, if you are more interested in long-term returns, you should compare <strong>monthly account balances<\/strong>.<\/p>\n<p>Talking about the actual calculation process, finding the largest peak in your equity curve is the starting point for determining the MDD. After you've determined where your equity curve's highest peak is, you'll need to determine where its lowest point is. The MDD is calculated by dividing the difference between these two values by the highest point.<\/p>\n<p>For instance, if <strong>account equity reaches $10,000 <\/strong>following a trade entry, drops to $9,500, and then rises to $10,500 later, you have a $500 (or 5%) drawdown. Note that many traders consider <strong>a lower MDD<\/strong> to be important because it signifies less risk.<\/p>\n<p>However, while the rate of return on investment is important, it doesn't tell the whole story when it comes to risk. An investment could have a high rate of return but its <strong>value could still drop dramatically before increasing again<\/strong>. Investors would be subjected to increased volatility and more inclined to sell at a loss. The drawdown gives additional information to investors to help them understand how much money they would potentially lose on a specific investment.<\/p>\n<p>Besides, the <strong>maximum drawdown<\/strong> is often used to estimate risk in a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-security/">securities portfolio. A higher MDD suggests a higher risk level, while a lower MDD indicates a <strong>lower risk level<\/strong>. <\/p>\n<p>Let’s say that an investment fund has an average return of 10% but a maximum drawdown of -20%. It suggests that there were periods when investors might have lost 20% of their investment if they had <strong>bought at the top <\/strong>and sold at the bottom, even if the average annual return was good.<\/p>","definition":"the greatest drop in value from a peak value of an investment over a certain time period.","status":"published","meta_title":"What is Drawdown? Definition & Meaning | Crypto Wiki","meta_description":"Drawdown meaning: Drawdown - the greatest drop in value from a peak value of an investment over a certain time period.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master’s degree on Economics, Politics & Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US’ Western and Japan’s Collective forms of capitalism, 1945-2020.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}"
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Tokens?","status":"published","modified_content":null},{"chapter_id":8,"order":5,"slug":"how-to-research-crypto","title":"Crypto Research Fundamentals & Social Signals: Your Daily Trading Strategy","status":"published","modified_content":null},{"chapter_id":8,"order":46,"slug":"portfolio-diversification-definition","title":"Portfolio Diversification: The Whats, the Whys, and the Hows","status":"published","modified_content":null}]},{"id":9,"title":"Mining","slug":"mining","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-crypto-mining.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-mining-101.jpg","rating":80,"sections":[{"chapter_id":9,"order":1,"slug":"what-is-crypto-mining","title":"Crypto Mining: What It is and How Does It Work?","status":"published","modified_content":null},{"chapter_id":9,"order":2,"slug":"what-is-a-mining-pool","title":"Mining Pools: Is Collective Mining Better Than Solo Mining?","status":"published","modified_content":null},{"chapter_id":9,"order":3,"slug":"what-is-staking-crypto","title":"An Advanced Look into What is Staking Crypto","status":"published","modified_content":null},{"chapter_id":9,"order":4,"slug":"what-is-proof-of-stake-vs-proof-of-work","title":"Proof-of-Work VS Proof-of-Stake: The Differences That Matter","status":"published","modified_content":null},{"chapter_id":9,"order":5,"slug":"what-is-crypto-mining-rig","title":"Crypto Mining Rig: What It is and How to Build One?","status":"published","modified_content":null}]},{"id":10,"title":"Crypto Terms","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/crypto-101-glossary.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}]"
current-chapter="D"
current-section="what-is-drawdown">