What is the drawdown in cryptocurrency investments and 3 methods to limit losses

By comparing the highest and lowest value of your portfolio over a given period, we define the drawdown. This is the maximum sustained or probable loss on an investment.

For example, you bought € 100 in Bitcoin. After a month, Bitcoin’s value fluctuated. During the fluctuations, the highest value of your investment was € 110 and a few days later the lowest value of your investment was € 95. Throughout the month, your small portfolio remained between these 2 values.

Your withdrawal during this period is therefore:

  • (110-95) / 110 = 0.1363 or 13.63%.

A drawdown is calculated when the value of an investment falls below the highest peak observed during the investment period. We can also calculate the drawdown taking into account your closed positions.

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The drawdown can be a volatility indicator. The bigger it is, the more it shows that the markets are turbulent. But it doesn’t just depend on the market. The size of your positions in relation to your total balance is something to consider. The larger your positions, the more pronounced the drawdown will be.

The bigger the drawdown, the harder it will be to recover!

Your ability to bounce to new heights is the main reason why you absolutely need to manage your drawdowns and make sure they are minimal. One of the most difficult components of investing is the asymmetry of the downside performance.

To recover from a 10% drawdown, i.e. bring the portfolio back to the highest level, it is necessary to generate a return of 11% (not 10%). To recover from a 50% drawdown, you must execute 100% (and not 50%) on the equity still available!

Read also Understand Centralized Exchanges (CEX) in just 3 minutes!

As shown in the table below, the situation becomes critical if your drawdown becomes more consistent.

Source: stock Exchange

How to avoid a too severe withdrawal?

1. Invest in a variety of types of businesses

One of the best ways to avoid major losses is diversification. In fact, all instruments do not fall at the same rate. Many bond funds and ETFs are active in 2022, unlike stock markets and cryptocurrencies as a whole.

2. Make frequent small investments rather than a large investment.

Investors face greater downside risk when making a single large investment. Imagine if you had invested a large portion of your savings in Bitcoin in November 2021!

This is why the DCA method can be of great help to investors.

3. Avoid using leverage

Traders who use excessive leverage have much larger drawdowns. Your account may be canceled by a 10% loss on a position that uses excessive leverage.

If you have less than 12 months of experience in cryptocurrencies and use leverage often, you greatly reduce your chances of being profitable🤷‍♂️ I think most could build themselves colossal exchanges with their futures losses 😔 Step by step.

Unfortunately, cryptocurrency traders turn to futures, options, or other complex products if they don’t see enough movement in the markets. They accelerate their losses most of the time.

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