It’s safe to say that no one really likes a market correction, but in general, there’s no need to panic whenever it happens.
Unlike the collapse, reforms are a natural part of all financial markets. Even in new asset classes like cryptocurrencies, corrections are a common occurrence.
So, what is a crypto market correction and how can you tell it from a market crash?
let’s dive deeper and check out together:
- What is digital currency market (price) correction?
- The reason for reforming the digital currency market
- What is cryptocurrency price crash?
- What is the difference between price fall and digital currency market correction?
- What is pullback and how is it different from digital currency modification?
- Bitcoin market analysis chart
- Ethereum market analysis chart
- Types of digital currency market correction
- The relationship between high volatility and price correction
- What is the best move during digital currency market correction?
What is digital currency market (price) correction?
According to economists, market correction occurs when the price of an asset decreases by 10% or more from its highest price.
Typically, corrections are made within days or weeks of trading.
While a market correction can potentially lead to a sustained bear market, it does not cause significant fear-induced selling (aka surrender).
In fact, many market corrections lead to a period of lateral price action. Prices may also recover shortly after the correction.
Often, market corrections are not related to external news events.
Rather, these reforms are a natural function of supply and demand.
When there are not enough buyers in a given market, sell orders outnumber buy orders, which drives prices down.
Market corrections occur in all asset classes, including stocks, bonds and cryptocurrencies.
The reason for reforming the digital currency market
No cataclysmic events are needed to correct the crypto market. In fact, most of the reasons behind the reforms are due to low market demand.
Low demand, high supply
The most common explanation for a market correction is that demand begins to decrease.
Prices can only continue to rise as more people want to buy an asset, when the cost becomes too high for most buyers, sell orders outnumber buy orders, which can trigger a correction.
Short-term traders start taking profits
Short-term traders may put more pressure on the price of a cryptocurrency if they decide to sell a significant amount of their holdings.
High Liquidity Levels of Crypto Leveraged Trading
Since crypto prices are inherently volatile, there is a greater risk that leveraged traders will lose all their funds (aka liquid) if they trade against the market.
When a significant amount of liquidity occurs on major cryptocurrency exchanges, it can trigger a correction.
Short-term bubbles
Short-term upswings in the cryptocurrency market are usually not sustainable.
No matter how solid the fundamentals behind a crypto project are, there comes a time when sellers show up.
If the price of a digital asset rises too high and too quickly, you should expect a correction as more traders start to take profits.
Crypto News
Major news is more related to market crashes than corrections.
However, cryptocurrency related events, articles and rumors can always affect the price of a token or coin. There may be cases where this news causes a market correction.
What is cryptocurrency price crash?
A cryptocurrency crash is a sudden and drastic drop in the price of a cryptocurrency that leads to a decline in the market.
Such crashes can cause massive destruction of cryptocurrency holders’ wealth, and markets generally take years to recover, as happened on Black Thursday.
Black Thursday was a financial market crash event that occurred on March 12, 2020.
Black Thursday was created due to the global coronavirus pandemic and investor concerns following US President Donald Trump’s imposition of travel bans on travelers from the Schengen area.
This is the worst drop in the stock market in one day since Black Monday in 1987.
When the financial markets fall and fall into a bear market, it is often a good time to buy stocks or a cryptocurrency, in this context, Warren Buffett, one of the great trading and investing experts, says:
“Buying a great company at a fair price is far better than a fair company at a great price.”
Some of the effective factors in the fall of the cryptocurrency market are:
- General crashes in financial markets due to macro economic events
- Lack of proper regulations
- News and events
- System errors that cause massive selling by investors.
What is the difference between price fall and digital currency market correction?
The price drop is more severe than the reforms. While market corrections can take days or weeks, market crashes usually occur in a shorter time frame.
In traditional markets such as the stock market, if asset prices fall between 10 and 20 percent, it is called a crash.
Because digital assets are more volatile, coins and tokens can experience losses of more than 20% during a crash.
The smaller an altcoin, the more likely it is to drop more than 20% during these periods.
Price crashes are usually triggered by major news events or macroeconomic data, for example, when the World Health Organization declared Covid-19 a global pandemic, the price of Bitcoin fell by 40% in one day.
As another example, Bitcoin fell from around $32 to $0.01 in 2011 in response to news of hackers breaking into the Matt Gax Bitcoin exchange.
Emotions during a market crash are different from those of a market correction. While crypto holders will feel the fear during the crash, the correction will not cause widespread panic in the financial markets.
Prices may recover after a market crash, but the sharp drop is more likely to lead to a bear market or bear market.
Formally, if the price of an index or asset falls by more than 20%, it is likely to enter a bear market.
What is pullback and how is it different from digital currency modification?
A pullback represents the mildest form of selling in the markets, which may cause a drop of less than 10% in the price of cryptocurrencies.
As a result, pullbacks like corrections are often seen as an opportunity to buy an asset that is in an overall uptrend.
Examples of digital currency market reform in the past years
1- 29% Bitcoin price correction during the 2017 bull market:
Bitcoin market analysis chart
During the bull market of 2017, Bitcoin was able to experience a growth of more than 5000%, during this bull market, we saw the correction of the price of Bitcoin many times, but after that, this cryptocurrency continued its upward movement.
During this correction, Bitcoin dropped from its peak of $8,000 to $5,500. After this correction, Bitcoin was able to reach $11,000 with a 100% price growth in 17 days.
2- 20% correction of Ethereum price in the bull market of 2020:
Ethereum market analysis chart
During the bull market of 2020, Ethereum was able to experience a growth of more than 2800%, during this bull market, we saw the correction of the price of Ethereum many times, but after that, this cryptocurrency immediately continued its upward movement.
During this correction, Ethereum dropped from its peak of $620 to $480. After this correction, Ethereum was able to reach $1300 with a 160% price growth in 40 days.
Types of digital currency market correction
In terms of technical science, digital currency market correction includes three types of simple, complex and ABC correction.
Simple fix
This type of correction consists of only one wave, the end of which can be identified using the Fibonacci correction technique.
Complex modification
These corrections have more than three waves where the peaks and valleys of the chart are placed in different positions relative to each other.
ABC modification
There is another type of modification that includes exactly three waves. This modification, called ABC, has a recognizable finish. In this way, when the currency price at point C of the chart moves in the opposite direction and reaches the (horizontal) range of point B, the correction ends.
The relationship between high volatility and price correction
If the demand to buy a digital currency is more than its supply, its price will go up, and if the supply is more than the demand, the price will fall.
These ups and downs in the digital currency market cause fluctuations in the digital currency market. In fact, upon reaching the price ceiling, the correction of the digital currency market occurs and the price decreases, and upon reaching the price floor, the correction leads to its increase.
The more volatile the market, the more possibility of price correction because the rapid movement of the price does not give buyers and sellers the opportunity to place orders. For this reason, the price retreats from its dominant upward or downward trend and allows traders to place orders.
What is the best move during digital currency market correction?
Although there is no way to prevent crypto market corrections, you can consider the following strategies during correction periods:
Follow Dollar Cost Averaging (DCA) Strategy
DCA refers to the strategy of buying small amounts of assets over the long term.
Corrections may be a good time to use the DCA strategy to lower the average price of your crypto investment.
Often, you can set your automatic buy orders whenever a cryptocurrency drops by your desired percentage with the help of the Fibonacci technique and the relative strength index (rsi) indicator according to the DCA strategy on centralized exchanges (CEX).
Have a personal investment strategy
Before buying your chosen cryptocurrencies, have a clear investment plan. This will help you stay focused on your long-term financial goals during extreme market swings.
Set a stop loss for short-term trades
If you are considering a short-term crypto trade, one potential way to protect your position is to set yourself a stop loss, which can help you in the event of an unexpected correction. save from further losses.
Stake your crypto
Some long-term cryptocurrency holders lock their crypto in a pool to resist the temptation to sell during a correction.
Since the cryptocurrency is locked in these pools for a certain period of time, it is impossible to quickly cash out the tokens.
This strategy might be good if you want to hold your cryptocurrency for years and fight sentiment based trading. In addition, you can earn money this way.