Breakeven Multiple
Breakeven Multiple is the value by which the current price of a
coin or asset needs to be multiplied by to reach its Breakeven Point (BEP). The Breakeven Point is the initial acquisition cost paid by a trader or investor (including trading fees). Therefore, when the market price of an asset drops below the price paid, the trader would need it to rise again in order to break even, so they can close their positions without gains or losses.
For example, if a trader buys a coin at a market price of $10 per unit, and then it falls to $5, he would need that coin value to double (100% increase) in order to return to its initial purchase price. In this case, the breakeven multiple would be 2.
Sometimes, the Breakeven Multiple may also refer to the multiple by which a cryptocurrency (or any other asset) needs to rise in order to reach its previous
All-Time High (ATH). For example, let’s imagine that a cryptocurrency ATH was $1,000, but it is now being traded for $250 (75% drop). In this case, the breakeven multiple is 4 because it needs to experience a 4-fold gain (300% increase) in order to reach its peak price again.
Note that the breakeven multiple is not a percentage, but an absolute number. If we consider the drop percentage of the previous example (75%), the price of that asset would need to increase 300% (4x) to reach $1,000 again.
The breakeven multiple can be easily calculated by dividing the initial price (ATH or buying price) by the current market price:
x = Initial Price / Current Price
Considering our previous example, we would have the following equation:
x = 1000 / 250 = 4
The concept of Breakeven Multiple illustrates that the percentage required to recover after a drop is much higher than the percentage of the drop itself. This means that an increase of 75% is not enough to break even after a decrease of 75%. That is the reason why many traders make use of
stop-limit orders to avoid big losses - especially during
bear markets that usually present long periods of
capitulation or panic selling.