Crypto Volatility and Drawdowns: Why a 50% Loss Needs a 100% Gain

What are volatility and drawdowns?

Volatility means how much and how fast a price moves up and down. Crypto prices can be very volatile. Canada's Ontario Securities Commission notes that they can rise or fall by large amounts several times in one day.

A drawdown is a fall from an earlier high point, called a peak. If a coin goes from $100 to $75, the drawdown is 25%.

A drawdown describes the past. It does not tell you where the bottom is, when prices will recover, or whether they will recover at all. So a more useful question is this: what would a fall like this do to the money I need?

For real examples, read about Bitcoin's biggest crashes and Ethereum's crashes. This lesson sticks to made-up numbers, so the arithmetic stays clear.

Why does a loss need a bigger gain to recover?

Start a made-up coin at 100. It falls to 75, a loss of 25%. To get back to 100, it must gain 25. But 25 out of 75 is 33.3%, not 25%.

A 25% gain from 75 only reaches 93.75. The two percentages start from different numbers. That is why "down 25%, then up 25%" does not bring you back.

The deeper the fall, the faster the climb grows. This is arithmetic, not a forecast. Fees make the climb a little steeper still.

Does a big bounce mean I have made it back?

Not always. Say a made-up position falls from $1,000 to $500. Then it jumps 40% to $700. The latest move looks great, but you are still $300 below where you started.

Both headlines are true: "up 40%" and "down 30%". A chart that only shows the rebound tells half the story.

What if I can't sell at the price I planned?

A price on a chart is not the same as a sale. Canada's securities regulators list liquidity, platform and technology risks, not just price swings. Liquidity means how easily you can sell without pushing the price down. When buyers are scarce, your sale may fill lower, or not at all.

Say your plan was to sell at $80, but the only buyer paid $74. Write down $74, not $80. If the app showed an error and nothing sold, write that down too.

Don't pretend you sold at a better price just because the chart passed through it later. A fall in price, an order that does not fill and an account you can't reach are three different problems. Each one needs its own line in your notes.

How much of my money could a crash touch?

The same fall hurts very differently depending on how much you hold. Imagine a $10,000 portfolio with three different amounts in crypto, and a 60% crypto crash.

This is not advice on how much to hold. It shows how the size of your position, the amount you hold, changes what the same price move does to you.

Now make the test harder. Let your other savings fall at the same time, and add a surprise bill. Would the money still be there when you need it? A plan that only works if you can wait for years may not fit a bill that is due in six months.

The UK's Financial Conduct Authority gives a simple rule: never invest money you can't afford to lose.

Will crypto always recover after a crash?

No one can promise that. The Ontario Securities Commission warns that crypto investors can lose some or all of their money. ASIC Moneysmart in Australia says that if a crypto asset fails, you will most likely lose all the money you put in.

Some coins have recovered after big falls. Others have failed. If you only study the coins that still exist, the past looks better than it really was.

Try this: a coin falls 20%, then rises 20%. Is it back where it started? From 100, the fall takes it to 80 and the rise takes it to 96. It is still 4% down. To get from 80 back to 100, it needs a 25% gain.

Next, see what real Bitcoin crashes looked like in 5 big Bitcoin crashes. Later in the path, learn the warning signs of crypto scams. A loss is not proof of fraud, and a rising balance is not proof that a platform is real.