From the ashes: Calculating the odds of a cryptocurrency reaching a new all-time high after a Major Drop
“It will surely go up again, r-right?”
Deep in this bear market people can go to great lengths to justify their investments into a shiny flavor-of-the-month coin which will make them rich as soon as it climbs out of a 94% price drop. With even Bitcoin dropping 77% from its spectacular high of $69000, there is a lesson to be learned for the eternal bulls. So here I am, using the power of statistics to try and glimpse the light at the end of this deep tunnel.
The question is: For a given cryptocurrency, what is the probability of reaching a new all-time high in price after a significant drop?
Gathering the Data
Using the CoinGecko API (Specifically, /coins/{id}/market_chart endpoint), I obtained full historical daily prices and market caps for some 12899 cryptocurrencies. And since the data for daddy Bitcoin from CoinGecko was incomplete (starting from April 2013, when the price was already around $135), I had to use another source to populate the data for BTC.
The number of valid coins, however, ended up being 4378. All I had to do was exclude:
- Erroneous data (did you know that a coin called Snetwork had negative marketcap at one point?);
- Bunch of newborn and dead nanocaps which have 5–10 days worth of dubious data.
This dataset is far from ideal, since there still are a lot of wrapped assets, stablecoins, etc. But for our purposes that will do.
All that is left is to analyze historical marketcap data to identify the cycle tops and bottoms for each coin in the list. A simple WinForms app should do the trick.
Simple ATH Probability (SAP)
First let’s set a drawdown threshold at 40% — anything less is considered a mere pullback. For Bitcoin, this gives us seven cycles with price drops ranging from 50% all the way to 92%.
Then, the calculation is trivial: if a coin lives to see another ATH after a certain drawdown, that’s a 1. If not - 0. Then lump all these results from all the coins and we get an average probability of surviving any given drop. Easy enough, right?
Something’s not right here, we got higher probability of a comeback from a bigger drawdown! There must be something missing…
Cumulative ATH Probability (CAP)
Let’s imagine a coin that makes a comeback after a 60% drawdown. The question is: would it also make a comeback if that drop was not 60% but 59%? I’d say yes, every successful return from a drawdown should count not only for that specific drawdown percentage, but for all smaller drawdowns as well!
The inverse is also true: if a crypto fails to make a new ATH after a 70% drop, it also wouldn’t make one with all drawdowns higher than 70%.
After modifying the dataset according to the rules above, here’s what we get:
That’s it then? 90% drawdown means 50% chance of another ATH for any cryptocurrency? Not exactly. So far, all data points are considered equal, but the coins that we’re looking at are anything but.
The bigger they are, the harder they fall
When studying the likelihood of a crypto coin hitting new highs after a price dip, it’s crucial to keep in mind the size of the coin’s market cap. You see, comparing a small fry coin with a market cap of just a few million dollars to a behemoth like Bitcoin just doesn’t make sense. These two types of coins operate in completely different leagues, and it’s unreasonable to expect them to follow the same patterns or trends.
Hence, let’s split our drawdown data points into four groups based on their market cap during the dip:
This separation paints an interesting picture:
Unsurprisingly, the chart shows that cryptocurrencies with smaller market capitalization tend to have a greater probability of reaching new all-time highs after a drawdown, compared to larger market cap coins. This observation highlights the potential for increased volatility and quicker recovery in coins with smaller market cap, offering potential opportunities for investors and degen traders alike.
There is another property that differs from coin to coin and might give us additional insight. I’ll call it Recovery Cycles — it shows the number of times a cryptocurrency has reached a new all-time high after experiencing a significant drawdown.
Survival Of The Fittest
Guess which coin has a better chance of surviving a major drop: the one that falls like this for the first time, or the one that went through this several times already?
Let’s see what we got:
There is it! A clear correlation showing that the more times a crypto in question survived a significant drawdown (40%+ in our case), the more chances it has of ever making another ATH. Nice!
And now, since I like these charts so much, let’s see how the probabilities would look, separated by both Market cap and Recovery Cycles:
Using the data
Here’s a link to the Google Doc with calculated probability of a new ATH for every coin out of 4245: Link
Alternatively, you could do this manually. Here’s how to use these charts to calculate the probability of making a new ATH after a 40%+ price drawdown for any given coin:
- Find out how many cycles the coin had (one cycle = ATH and 40%+ drop);
- Get the marketcap at the bottom of the last drawdown;
- Get the marketcap drop percentage of the last drawdown;
- Use one of the charts above based on the cycle count and the marketcap of the last drop.
Example
- Coin: Solana
- Cycles: 3
- Last drop marketcap: $4,171,782,665 (Large Cap), 95%
- Using CAP for 3–4 cycles chart, Large Caps dataset and 95% drop we get 2% probability of Solana ever making another ATH
Some more examples
Fun Facts and Interesting Finds
Biggest losers:
- Bitcoin Cash — 98% drop at 1.4B MCap
- Terra Luna — 99% drop at 500M MCap
- Iota — 98% drop at 300M MCap
- Nem — 98% drop at 250M MCap
- Honorable mention — Terra USD — 99.65% drop at 66M MCap
Greatest survivor:
- Monero — 11 drawdown cycles, last drop 78% at 2B MCap, CAP = 70%
Conclusions
Based on my findings, there is a clear correlation between the price drawdown percentage of the cryptocurrency, and the probability of said crypto ever recovering and making another ATH. Furthermore, smaller coins (i.e. cryptos with market cap) have a better chance of recovering even from the most extreme drops. Additionally, the amount of such drawdown cycles also plays a role in determining the ATH odds, such that the more drawdown cycles a coin has had already, the more chances it has of surviving another one.
Based on this research, the best coins to invest in to maximize the profits have the following attributes:
- Able to hold their price well from the last ATH (less drawdown % — better);
- Have been through several ATH-to-drawdown cycles already (more cycles — better);
- Have a relatively small market cap.
Disclaimer
This research solely focuses on the historical marketcap data of cryptocurrencies available in CoinGecko API. As such, it ignores all of the current macroeconomic trends, government regulations and cryptocurrency market sentiment and public perception in general. Furthermore, no fundamental properties of any coin in this article have been taken into account, hence the probability of a new ATH for a solid project with vibrant community and an outright scam coin will be shown the same if such coins have similar historical marketcap data.
This is not financial advice. Do conduct your own due diligence before making any investment decisions
Acknowledgments
Thanks to CoinGecko for being awesome and having an easy access to the historical price data. You can download the dataset I’ve used here
Huge thanks to you for checking out my article and making it to the end, I hope it was informative and helpful! Let me know your thoughts in the comments below.
Follow me on Twitter and Nostr, and toss some sats my way if you feel like it :)
