A market correction can occur in any financial market. Thus, not only in the cryptocurrency market, but also, for example, in the stock and bond markets. It is characterized by the fact that an asset loses a significant part of its value in a short period of time. Such a correction is often a response to an abnormal increase in the price of an asset. It returns the asset price to its long-term trend. In addition to abnormal growth, other factors, such as macroeconomic shifts, can lead to market correction.
Corrections do not necessarily have to concern the market as a whole. They can also occur in relation to individual cryptocurrencies, such as Bitcoin, Ethereum, Cardano, etc. This can be clearly seen on Coinmarketrate.com. As a rule, a correction is said when the price has fallen by 10% compared to the last peak. In the cryptocurrency market, it is quite natural to observe falls of a more significant scale. Correction from 20 to 60% occurs regularly. This is due to the fact that the cryptocurrency market has been, and remains, very volatile so far.
With the help of various trading indicators, investors try to predict when a correction may occur. However, the cryptocurrency market is unpredictable. Few people can accurately predict when a correction will occur. Therefore, it is almost impossible to predict when the correction will begin, how long it will last and when it will end. In addition, you always have to expect in such cases how much value the cryptocurrency will lose during the correction. Well, it’s not possible to predict at all.
How does the market correction happen
Corrections are the opposite of a “bullish rally”, which is a period of steady price growth. However, corrections and bullish growth are related to each other, like Yin and Yang. Here’s the thing: when cryptocurrencies grow in value over a long period of time, they become overvalued, which leads to the fact that the price of the cryptocurrency does not match its value. As a result of the high price, investors will be discouraged, the demand for cryptocurrencies will decrease, and the supply will increase. This marks the beginning of a correction. This is what we are seeing today.
Some traders and investors at such moments sell part of their crypto assets to make a profit. In combination with negative news (FUD), or other external factors, the correction may intensify. The cryptocurrency suddenly drops very sharply, and other traders and investors fear the worst for the price of the corresponding cryptocurrency. Now they will also sell their cryptocurrencies and accept any losses. This chain reaction may continue for some time until a price is reached at which demand increases so much that the price drop stops.
Examples of market correction in the past
During bullish growth, most cryptocurrencies experience numerous corrections. Bitcoin can be cited as an example: in April, one BTC was worth $ 64,000, which was a new historical maximum for a crypto asset at that time. On the way to its historical maximum, Bitcoin has experienced many corrections some of which reached 40%. Despite the correction, the price continued to rise for a long period of time. In most cases, the price of cryptocurrency never rises in a straight line. To reach the next peak of value, the price goes through ups and downs.
During bullish growth, a market correction is usually followed by a price recovery. Only when the market correction continues for too long, bullish sentiment can turn into bearish. A market correction will eventually lead to a longer period of price declines, and then the entire market will move into a so-called bear market.
In the crypto industry, during a bear market, price declines can take frightening forms. The price reduction in a relatively short period (from several months to weeks, or even days) can exceed 70%. In the bear market of 2018 and 2019, Bitcoin fell in price by more than 80%. For most altcoins, the price drop was even more extreme. A 90-99% drop in prices was the rule rather than the exception during the bear market.
How to protect yourself from market correction
A correction of tens of percent is a cause for concern for some investors. Short-term or day traders trading with leverage can also see their crypto portfolios evaporate in a short period of time. But for medium- or long-term investors and traders, a correction is not something to be afraid of and immediately panic. Corrections are part of the market cycle.
Cryptocurrency market corrections occur regularly, but in most cases they do not lead to a bear market. A common strategy that investors use during a market correction is that they simply “hold” their cryptocurrencies, which means that no matter what, you hold your coins instead of selling them.
An alternative to “walking” is to set a stop loss. This means that you decide at what cost you will sell the cryptocurrency. If you want to know when a cryptocurrency will reach a certain value, but do not want to sell it immediately, you can also set alerts that will inform you about the price.
If you don’t like this option either, you can always exchange your cryptocurrencies for stablecoins during the correction. Stablecoins have a stable value and are mainly pegged to the US dollar. If you convert cryptocurrencies into stable coins such as Tether, then 1 Tether (USDT) is always equal to 1 US dollar. This means that you will not lose money when the market falls and will be able to easily buy again at a more favorable moment.
But one of the most popular and real options remains staking, which, when using the hodling strategy, make a profit for delegating their crypto assets to staking, as the DEL token, the DecimalChain blockchain, offers.
Investing during a market correction
Corrections are a setback for many investors and traders. However, there are enough investors who look at the correction in another way. The correction leads to a sharp drop in prices. Some investors see this drop as an ideal opportunity to buy additional coins. When their prices rise again, they will receive a higher profit than the investors who held the coins. This is a strategy of buying on “failures”.
But there are certain risks associated with this strategy. During a correction or bear market, you can invest in a cryptocurrency, but there is no guarantee that this cryptocurrency will ever recover after a correction. There is a lot of hype around some cryptocurrencies, as a result of which they grow rapidly in a short period of time. If it turns out that the hype was greater than the project itself, then in most cases such a cryptocurrency will not recover. Depending on the project, supply and demand, economic factors, etc., the cryptocurrency will recover and continue to grow.
Conclusion
During its life, Bitcoin has experienced several “bullish” and “bearish” markets. So far, it has recovered after every bear market.
Currently, the BTC has reached a new historical high of $69,000. This is almost 3.5 times more than in 2017. Hodlers or investors who bought a crypto asset before or during the bear market are all in profit at the moment.
Despite the fact that Bitcoin has recently experienced a correction of about 20%, there is no reason to panic. Corrections come in all forms during a bull market. With experience and knowledge, you will be able to evaluate the value of these corrections better and better over time.
