A Quick Analysis of Historical Drawdowns for Bitcoin (BTCUSD):
What is a “Drawdown”?
By definition a drawdown is the peak-to-trough decline during a specific time period of an investment and usually quoted as the percentage between the peak and the subsequent trough. The overall length of a drawdown is measured from the time a retracement from a peak begins to when it reaches a new high again.
Drawdowns present a significant risk to investors when considering the uptick in share price needed to overcome a drawdown. For example, a drawdown of 20% requires a 25% return to return to the original price level, while a 50% drawdown requires 100%. Normal investment strategy advice is to try to avoid drawdowns of 20% or more before cutting losses.
By analyzing aggregated exchange trading data for daily Bitcoin prices taken from Cryptocompare.com from 2010-1-17 to 2018-1-22 (2747 data points), it turns out that Bitcoin has “only” suffered 60 drawdowns. As can be seen from the chart below, these drawdowns ranged between -1% to -93%.
Plot of All historical BTC drawdowns:
The following table below analyzes the larger historical drawdowns of 20% or more. It shows that there were only 13 drawdowns greater than 20% (ranging from -20% to -93%) of which 5 were in 2017!
Table: All BTC Drawdowns of greater than 20%
The table shows that our current drawdown of -42% from an aggregate peak price of $19,345 (on 12/17/2017) is only the 5th largest in history and that we are currently in day 38 of the retracement. Although the current drawdown feels bad due to the rapid sell off, it is relatively milder compared to the -70% pullback on 4/10/2013 which took just SEVEN days to hit the trough!
Back to All Time Highs (ATH) please!
By the looking at the median total drawdown length of 55 days for these larger drawdowns, we can “guesstimate” that it could take another approximately 17 days (around Feb 8th) for our current drawdown to recover back to its original peak level. Hence for traders in Asia, fingers crossed for a new ATH of $20,000 by Chinese New Year!