volatility and want a steadier investment ride.</p>\n<p>Drawdown can also be used in trading for things like:</p>\n<ul>\n<li><strong>Describing the difference</strong> between the balance and the equity at any given time.&nbsp;</li>\n<li>Seeing how stable <strong>a</strong> trading strategy or model is over time.&nbsp;</li>\n<li>Estimating how much equity capital would be needed to avoid drawdowns below certain levels.</li>\n</ul>\n<h3>How Is the Maximum Drawdown Calculated?</h3>\n<p>The maximum drawdown (MDD) formula:</p>\n<p>​​<span style=\"color: #ba372a;\"><strong>MDD = (Trough Value &mdash; Peak Value) / Peak Value</strong></span></p>\n<p>The maximum drawdown can be calculated in two ways. If you want to know your maximum loss on a daily basis, you should compare daily trading prices. However, if you are more interested in long-term returns, you should compare <strong>monthly account balances</strong>.</p>\n<p>Talking about the actual calculation process, finding the largest peak in your equity curve is the starting point for determining the MDD. After you've determined where your equity curve's highest peak is, you'll need to determine where its lowest point is. The MDD is calculated by dividing the difference between these two values by the highest point.</p>\n<p>For instance, if <strong>account equity reaches $10,000 </strong>following a trade entry, drops to $9,500, and then rises to $10,500 later, you have a $500 (or 5%) drawdown. Note that many traders consider <strong>a lower MDD</strong> to be important because it signifies less risk.</p>\n<p>However, while the rate of return on investment is important, it doesn't tell the whole story when it comes to risk. An investment could have a high rate of return but its <strong>value could still drop dramatically before increasing again</strong>. Investors would be subjected to increased volatility and more inclined to sell at a loss. The drawdown gives additional information to investors to help them understand how much money they would potentially lose on a specific investment.</p>\n<p>Besides, the <strong>maximum drawdown</strong> is often used to estimate risk in a <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-security/">securities portfolio. A higher MDD suggests a higher risk level, while a lower MDD indicates a <strong>lower risk level</strong>.&nbsp;</p>\n<p>Let&rsquo;s say that an investment fund has an average return of 10% but a maximum drawdown of -20%. 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central authority will be able to use the powers bestowed upon it for its own personal gain thus avoiding corruption and all activities related to it.&nbsp;</p>\n<p>Decentralization maximalists highlight other advantages of a decentralized system such as democracy, freedom of speech, and <strong>community-driven organizations</strong>, among other things.</p>\n<p>It&rsquo;s important to keep in mind that the implementation of a decentralized system in every aspect of our lives sounds good only in theory.&nbsp;</p>\n<p><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">Decentralization, just like any other system, has its disadvantages. However, decentralization maximalism doesn&rsquo;t take any of them into account when evaluating the benefits it could provide.&nbsp;</p>\n<p>The main disadvantages that come with decentralization are a lack of a continuous vision, loss of control, <strong>high costs</strong>, and general inefficiency. In extremely dire situations, an absence of a governing authority can even make it possible for it to turn into full-blown anarchy.</p>\n<p>When it comes to the crypto sector, especially <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-defi/">decentralized finance (DeFi)</strong></a>, decentralization maximalists are generally seen as extremists that see their viewpoint as superior to any other.&nbsp;</p>\n<p>Another example of this type of thinking is Bitcoin Maximalists. They take on the view that <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin will become the only cryptocurrency used within the sector due to its unquestionable superiority over every other digital currency.</p>\n<p>Be careful as to not confuse decentralization maximalism with the general term decentralization which refers to the lack of central authority in organizations only.</p>","level":"easy","meta_title":"What is Decentralization Maximalism? Definition & Meaning | Crypto Wiki","meta_description":"Decentralization Maximalism meaning: Decentralization Maximalism - is an outlook that highlights the benefits of decentralization in every aspect of one’s lifestyle.","meta_keywords":null,"language":"en","created_at":"2022-04-06T13:14:43.000000Z","updated_at":"2022-05-13T14:32:24.000000Z","preview_url":"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-decentralization-maximalism"},"prevSection":{"id":862,"original_id":null,"author_id":42,"translator_id":null,"title":"What is Decentralization Ratio?","slug":"what-is-decentralization-ratio","section":"D","keyword":"Decentralization Ratio","status":"published","definition":"the ratio of decentralized collateral value over the total supply of stablecoins backed for those assets.","content":"<p>The <strong>proportion</strong> of decentralized collateral value over the entire <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-stablecoin/">stablecoin supply backed by those assets is referred to as the Decentralization Ratio (DR). In other words, it&rsquo;s a method to estimate how much of an asset's value derives from decentralized sources. It is <strong>a</strong> great way for assessing how risky an asset is. The DR considers all underlying components of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-collateral/">collateral claimed by a protocol, not simply those contained inside its system contracts.</p>\n<p>To calculate the off-chain risk <strong>of any stablecoin</strong> the DR can be used. Collateral with an excessive off-chain risk is considered to be 0% decentralized. Examples of such collaterals are <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-fiat/">fiat coins</strong></a>, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-custodial/">custodial assets</strong></strong></a>, and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-security/">securities. Ethereum, on the other hand, and reward tokens such as CVX and <strong>CRV</strong> would be considered 100% decentralized.</p>\n<p>Examples of off-chain risks include government entities freezing or interfering with assets, as well as compulsory <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-know-your-customer-kyc/">KYC. A great example of this could be if the<strong> transfer of USDC to non-KYC businesses</strong> would be prohibited by the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-securities-and-exchange-commission-sec/">SEC. In addition, off-chain risks include risks related to the currency in which those assets are based, for example, US Dollar inflation for USDC.</p>\n<p>To give you an example of how the DR is calculated, let&rsquo;s take the <strong>FRAX3CRV LP token</strong>:</p>\n<ul>\n<li>FRAX3CRV LP token consists of 50% FRAX and 50% 3CRV. <em>Though we won&rsquo;t take the FRAX part into account because it can&rsquo;t back itself</em>.</li>\n<li>The 3CRV is made of 33% USDC, <strong>33% USDT</strong>, and 33% DAI.</li>\n<li>USDC and USDT are each made up of 100% fiat coins, while <strong>DAI</strong> is made up of 60% fiat coins.</li>\n<li>Therefore, each $1 of FRAX3CRV LP token has around $0.066 ($1 x 0.5 x 0.33 x 0.4) or 6.6% worth of <strong>value coming from decentralized sources</strong>.</li>\n</ul>","level":"easy","meta_title":"What is Decentralization Ratio? Definition & Meaning | Crypto Wiki","meta_description":"Decentralization Ratio meaning: Decentralization Ratio - the ratio of decentralized collateral value over the total supply of stablecoins backed for those assets.","meta_keywords":null,"language":"en","created_at":"2022-04-06T11:11:31.000000Z","updated_at":"2022-05-13T14:32:24.000000Z","preview_url":"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-decentralization-ratio"},"currentChapter":"D","currentSection":"what-is-drawdown","chapterTitle":"D","readingLevel":"medium"},"url":"/crypto/learn/crypto-terms/what-is-drawdown","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0">
Crypto Terms: Letter D

What is Drawdown?

Drawdown MEANING:
Drawdown - the greatest drop in value from a peak value of an investment over a certain time period.
Medium
2 minutes

Let's find out Drawdown meaning, definition in crypto, what is Drawdown, and all other detailed facts.

Usually, “drawdown” is used to refer to an investment's maximum loss in value from its peak value over a period of time. Drawdown can help you determine how risky a particular investment or fund is and whether it is suitable for you. The riskier the fund is, the bigger the possibility for value loss. Therefore, you can choose a fund with fewer drawdowns if you are worried about volatility and want a steadier investment ride.

Drawdown can also be used in trading for things like:

  • Describing the difference between the balance and the equity at any given time. 
  • Seeing how stable a trading strategy or model is over time. 
  • Estimating how much equity capital would be needed to avoid drawdowns below certain levels.

How Is the Maximum Drawdown Calculated?

The maximum drawdown (MDD) formula:

​​MDD = (Trough Value — Peak Value) / Peak Value

The maximum drawdown can be calculated in two ways. If you want to know your maximum loss on a daily basis, you should compare daily trading prices. However, if you are more interested in long-term returns, you should compare monthly account balances.

Talking about the actual calculation process, finding the largest peak in your equity curve is the starting point for determining the MDD. After you've determined where your equity curve's highest peak is, you'll need to determine where its lowest point is. The MDD is calculated by dividing the difference between these two values by the highest point.

For instance, if account equity reaches $10,000 following a trade entry, drops to $9,500, and then rises to $10,500 later, you have a $500 (or 5%) drawdown. Note that many traders consider a lower MDD to be important because it signifies less risk.

However, while the rate of return on investment is important, it doesn't tell the whole story when it comes to risk. An investment could have a high rate of return but its value could still drop dramatically before increasing again. Investors would be subjected to increased volatility and more inclined to sell at a loss. The drawdown gives additional information to investors to help them understand how much money they would potentially lose on a specific investment.

Besides, the maximum drawdown is often used to estimate risk in a securities portfolio. A higher MDD suggests a higher risk level, while a lower MDD indicates a lower risk level

Let’s say that an investment fund has an average return of 10% but a maximum drawdown of -20%. It suggests that there were periods when investors might have lost 20% of their investment if they had bought at the top and sold at the bottom, even if the average annual return was good.