In finance, the term ‘drawdown‘ describes the movement of the price of a financial instrument, or a portfolio of investments, over a given time period. Specifically, it is calculated as the difference between the maximum value (referred to as peak or maximum drawdown) and the minimum (trough or minimum drawdown) in that timeframe.
Drawdowns are mostly expressed in percentage terms, but in some cases they may be stated in absolute monetary terms, i.e. with reference to the unit of fiat currency or cryptocurrency considered.
The formula for calculating a percentage drawdown is as follows:
Drawdown% (DD) = ((Pmax – Pmin) / Pmax) * 100
In this case, Pmax corresponds to the maximum recorded in the period under consideration, while Pmin is the minimum in the same timeframe.
For example, if in a bear market the peak value of a crypto corresponded to €100 and the price fell to a minimum of €50, the drawdown would be 50%. The calculation of drawdown is used in trading to measure the volatility of an asset and the associated risk, in order to compare its performance with other types of investment.