Drawdown

Drawdown is the decline in an account or asset's value from a peak to a subsequent trough, usually expressed as a percentage. Maximum drawdown — the deepest such fall over a period — is a standard measure of how painful a strategy or asset has been to hold.

For example, a portfolio that grows to $50,000 and then falls to $35,000 before recovering has experienced a 30% drawdown. Bitcoin itself has repeatedly seen drawdowns exceeding 70-80% during bear markets, which is a defining feature of the asset class that any long-term holder has had to sit through.

Drawdowns matter because recovery is asymmetric: a 50% loss requires a 100% gain just to break even, and a 90% loss requires 900%. Deep drawdowns also break traders psychologically, causing them to abandon sound strategies at the bottom. This is why risk management focuses on limiting drawdown — through position sizing, stops, and diversification — rather than maximizing gains. A common misconception is that drawdown only counts realized losses; it is measured on total account value, so an unrealized paper loss from a peak is a real drawdown, and pretending otherwise ("it's not a loss until I sell") hides risk rather than removing it.