Crypto correction – what is a market correction?

Investors can only make a profit with a detailed analysis of market data and trends. One of the crucial signals here are the market corrections (not to be confused with a market crash or bear market). In this blog post, we’re dwelling on the peculiarities and reasons for the cryptocurrency market correction.

What is a market correction?

Market corrections are characterized by a drop of the major market index between 10-20% that lasts from a few weeks to a few months. Such a change usually happens after a spike in prices and is a typical part of a market cycle. Corrections happen in all types of financial markets – cryptocurrency, real estate, stocks, and others.

But what triggers the crypto correction and how to recognize it? No market can grow forever and, sooner or later, a market needs some balance and stabilization. This is the time when correction starts. Let’s imagine that we’re observing assets’ prices growth for some time now. The next logical questions are: When will this upward trend end and how can I make the most out of the coming drop?

Undoubtedly, investors need to be able to analyze market tendencies. However, any financial market depends, to a large extent, on a variety of external factors, including world politics, the economy, and even major natural disasters. A fine example of such interconnection is the start of lockdowns because of the COVID-19 pandemic. This decision by the WHO had dramatic effects not only on the local economies of all countries but on the international financial markets as well.

Crypto correction is frequently the aftermath of some serious changes in the outer world that are not directly connected to the market itself. During this time, investors don’t make investments actively but take time to re-evaluate the situation and plan their next steps. That is why prices go down but not much. This does not last for a long time because traders are only exploring their possibilities, but the market sentiment remains the same from a long-term perspective.

What happens when the market correction starts?

In the previous part of our article, we’ve discussed why market corrections happen in the first place. Now, let’s move to the factual piece of advice on what to do and how to safely maneuver through the correction:

• think of the reasons behind the corrections

If you see a full image of what’s going on outside of the financial markets, you can try to foresee or, at least, prepare for future possible outcomes.

• diversified portfolio

Bitcoin and Ethereum are not the only cryptocurrencies that are worth looking into. The more different assets you have, the smaller the chances of losing all your investments at one time.

• risk tolerance review

Correction is a good time to check your risk tolerance. If the market conditions are changing dramatically, you might need to adjust the risk tolerance level based on your possibilities and goals.

• buy the dip

Corrections do not necessarily mean losses. Purchasing assets at a lower price can be a win-win strategy for some investors.

Without a doubt, these tips are not universal and will vary depending on the market. But one thing is for sure here: never invest with your emotions. On the contrary, try to imagine what consequences your current decisions will have in the future.

Crash vs correction – what’s the difference?

Any trader should be able to differentiate the crypto correction, bear market, and market crash. Even though they are quite similar, it’s still possible to analyze what is what and behave accordingly.

• correction – a short-term dip in value (10-20% up to a few months)
• bear market – a long-term decline in assets’ pricing (more than 20% over many months, can be even longer than half a year)
• market crash – a rapid decrease in value of more than 10% within one day

As one can see, all these phenomena occur in all financial markets and are characterized by the dip in assets’ prices. The major difference between them is the duration and the magnitude of the dip. If the market starts going down, one of the best things to do is to watch it closely. If it’s just a correction, investors with well-thought trading strategies will probably not loose much. If the drop turns into the bear markets, one needs to adjust their trading strategy. Finally, a market crash is a rapid change, and it’s almost impossible to fully avoid it.

FAQ

Do corrections signal the start of a bear market?

Market corrections rarely indicate the start of a bearish trend. Bear markets last over extended periods, while corrections are shorter - from a few weeks to a few months. A crypto correction means that the investors have stopped buying assets for some time and are analyzing the world and the necessary data to develop or improve their future investment strategies.

Is a crypto market correction a good thing

Corrections are a natural part of financial markets (stocks, cryptocurrency, real estate, etc.). When the asset's price has been going up for quite some time, a correction takes place to balance out the market. Correction is not the same as a market crash or bear market - the last two are the long-term things that identify a change in the market sentiment.

What should I do during a market correction?

Neither bear markets nor correction or crash is the best timing for hasty decisions. Take your time to analyze all the data and indicators, and only then modify your investing strategy. During market corrections, it's wise to look at your asset allocation and review risk tolerance. These are the significant factors that have a huge impact on one's profit in any market conditions. Correction may be also useful for those who are ready to buy the dip and make use of the lower asset price.