What is a correction in the market?
Before the appearance of digital assets, the term was used to refer to stocks, bonds and traditional currencies.
Speaking about the definition of market correction, we can say that it is a stable decrease in the price of a particular coin by about 10-60% compared to the previous settled value. In most cases, the correction in the crypto market is short-term. After a few hours or days, the situation evens out and the price of the asset grows again. However, sometimes the correction can last for months.
You should always keep in mind that a correction in the crypto market can cause a global collapse in the price of a digital asset. In some cases, it can completely "kill" a coin and make further use of it unprofitable.
Why do market corrections happen?
There are a variety of reasons for market correction crypto. They can be roughly divided into three main categories:
Local causes are those that affect only one specific coin. Most often, the reason for such a correction is the overvaluation of the asset by users. That is when the price is too high, not many people are willing to buy the coin for that price. Accordingly, it begins to fall.
Regional reasons, despite the wording, are rarely related to any particular region. Most often it is some reason that affects a number of somehow related cryptocurrencies. For example, some kind of failure in one blockchain, the introduction of new technologies that improve or worsen the user experience, and so on.
Global causes are rarely directly related to the cryptocurrency market, but this does not prevent them from causing a correction. It can be the collapse of economies of certain countries, global pandemics, world economic crisis, the introduction of new technologies, adoption of new laws and so on. Such events become the causes of market corrections in crypto globally, affecting all or almost all assets. Another thing what causes market corrections is the statements of public figures, in one way or another, related to cryptocurrency. For example, several times the reason for global changes in the cryptocurrency market was the careless statements of Elon Musk. Without wishing to do so himself, he started a correction. If you want to know when will market correction happens, follow the news of the digital assets market, as well as the words of influential people.
Let's look at why market correction happens with the most popular digital asset, Bitcoin. To do that, let's take the market corrections history for this coin over the last couple of years.
Bitcoin was worth more than a few tens of thousands of dollars in April 2021 because of the events surrounding Tesla and Coinbase. The announcement of Elon Musk's $1.5 billion purchase of the digital coin, as well as the IPO of the largest U.S. cryptocurrency exchange, triggered massive interest. However, a number of important events subsequently occurred that provoked a market correction of Bitcoin, i.e., a price reversal.
- Binance was banned in the United Kingdom.
- Restriction of mining on the territory of China.
- Statements by influential individuals.
Restricting mining in China reduced the speed of transactions as the network adapted to the new processing power. It also led to a market correction of Bitcoin. In one day alone, it lost 13% of its value.
Key stages of market correction crypto
Crypto market correction usually has three main stages:
- Price rise.
Let's consider each of them individually.
This is actually not the start of market correction crypto yet, but one of the main reasons for its appearance. When the price of some coin has been growing for a long time, gradually the number of people who want to buy it decreases. Since there is no demand, the price decreases so that demand begins to match supply. This is the period of the beginning of correction on the crypto market. A sudden rise in the price of this or that digital asset can be one of the main ways of market correction prediction.
This is the main stage of the correction at which the price begins to fall. Most often, it is a relatively short period during which the value of an asset can fall by 10% or more. Sometimes there are several rollbacks, and in the interval between them, the price begins to rise. For example, it falls by 5%, then rises by 3%, then falls again by 5%, then rises again by 3%, and so on.
This period may be called market correction over. To simplify, at this point, demand becomes equal to supply, and the price stops falling. Depending on the situation and the cryptocurrency, the price may be held at a stabilized level for a while, after which another growth phase begins. Eventually, this will most likely lead to the beginning of a new correction again.
So if you want to know when will market correction end, wait for the stabilization phase.
How long market correction last?
A correction in the crypto market can last a long time, but sometimes the process takes just a few days. A correction may be brief and minor, in which case it may last for several hours or days. If the correction is severe and caused by serious factors, it can last for months.
It all depends on many factors, including the overall market situation, overall cryptocurrency price dynamics and other things. More often than not, it is difficult to give an estimate of how long the market correction is, as it depends on complex and dynamically changing factors. In general, a cryptocurrency market correction can last from a few days to a few months.
It is important to understand that the cryptocurrency market is dynamic and unpredictable, so a correction can start at any moment. For the same reason, it is quite difficult to determine the frequency of market corrections.
How to earn on the correction of the cryptocurrency market?
Making a profit in a falling market is much more difficult psychologically than in a rising market. However, there are several ways it can be done.
A profitable, but rather risky, way to make money from a falling rate is a short position. What is it?
A trader borrows the cryptocurrency and quickly sells it at the current price. The point is that he expects the value of this coin to drop in the near future. Let's look at this process step by step.
- The trader performs a fundamental and technical analysis of the cryptocurrency market and chooses the coin whose price should fall in the near future. The reasons for the cryptocurrency price drop can be different: negative news, a problematic situation around this type of digital coin, or the general economic situation.
- The trader then receives a borrowing from the exchange for a certain value of the coin that suits him. Once he has lent the cryptocurrency, a commission must be paid to the exchanges.
- The trader sells the coin at its current value.
- After that, it is necessary to wait for the price of a certain cryptocurrency to drop and buy it back, but much cheaper. The next step is to repay the loan and make a profit on the difference.
For example, the trader borrows coins and immediately sells them for $200 each. Soon the price decreased and the coins are already trading at $180. The investor buys the coins at $180 and pays back the debt. The investor is left with $20, which will be his profit after the commission is subtracted.
This type of trading is also called margin trading. Many platforms offer clients margin trading. But it should not be forgotten that it is a high-risk activity, and it seems simple only in theory. It is necessary to open the short position only when there is confidence in a falling price on the coins chosen by you. Otherwise, you can incur losses, paying debts and commissions.
You must take into account that exchanges, as a rule, take a commission off the borrowed money every 8-24 hours.
However, under favourable conditions, profit from shorting is at least 7% of the amount invested. The fact that traders mostly use borrowed funds solves the problem of the lack of large initial investments.
If you don't know "what's market adjustment" is or are not sure about your cryptocurrency trading skills, use copy trading - a very popular strategy for beginners. The essence of the strategy is to copy the deals of professional traders. In other words, all you need to do is to choose a copy trading platform, select a trader whose deals you want to copy, and hit the "start copy trading" button. As a result, you will get the same trading results as the trader you selected.
Another popular option is TradingView automated trading, which will help you automate any trading strategy. The idea is to receive trading signals from the popular TradingView platform. You can use them, for example, to determine the most successful entrance into the market. Or create your own trading robot based on these strategies, which will take care of all cryptocurrency trading duties.
Another option that works for market correction crypto is buying the asset in pieces. If you invest all the available funds in a particular coin, there is a high probability that the deal will be at an unprofitable price. It will be hard to correct the situation afterwards: you will either have to wait for the coin to rise, or sell it at a loss.
How does dollar-cost averaging? If you are going to invest $5000 in Bitcoin, for example, experts advise dividing this sum into several parts and investing them gradually. It is impossible to make absolutely reliable predictions about how the price of the asset will behave in the future. But if you follow this rule, you will always have a certain amount of money left over to buy the coin in case of a sharp drop in its price.
You can use a Bitcoin robot to automate any action with bitcoins. As we mentioned above, using cryptocurrency trading software can save time and automate any strategy. Another undeniable advantage of using trading robots is the ability to avoid mistakes that occur due to unnecessary emotions.
Dollar-cost averaging is not the most effective strategy, because there is a probability that the asset will go up in price over time, and you will buy it every time at a higher price. But in this case you will protect yourself from losing your initial investment: the profit from first purchases made at lower rates will compensate for possible losses from next transactions.
A HODL strategy involves the investor holding a promising coin for a long period, regardless of whether it falls in price or rises.
A careful approach to asset selection is necessary here. If the cryptocurrency is rated as proven and profitable to invest in, you can try to buy it and hold it for an extended period until the global rise in value.
Bitcoin, for example, has fallen, recovered and risen in value many times. Nevertheless, there are no exact guarantees of growth. After the last collapse from the November 2021 high of more than $68 thousand, the first cryptocurrency has not yet returned to that value.
There are many reasons to choose a passive HODL investment strategy. In particular, the strategy will work if you want to save and multiply your assets in the easiest way and don't want to spend a lot of time on active investments. According to experts, people choose this strategy because HODL does not require much effort and they have a strong belief that the price of cryptocurrency will grow in real value over a long period.
In addition, HODL has become a philosophy that helps investors confront limiting syndromes: FOMO (fear of missing out) and FUD (fear, uncertainty and doubt). These occur because of the volatility of the crypto market and affect impressionable investors, forcing them to sell their assets.
There are more than 10,000 different cryptocurrencies on the market. However, not every coin or token is worth investing in, because even now many of them do not show any growth. There are several tactics for creating a harmonious investment portfolio consisting of cryptocurrencies. First, you can choose coins that have the potential to grow during the year. Second, you should buy assets on drawdowns or deep declines. To do this, determine the desired low price of the cryptocurrency, wait for the coin to reach that level, buy and hold, hoping that it will rise in value.
Altcoin is any cryptocurrency that appeared after Bitcoin. According to Coinmarketcap, the website that tracks cryptocurrency prices, there are more than 10,000 altcoins. The most popular of these is Ethereum, which covers nearly 19% of the cryptocurrency market.
While Bitcoin and Ethereum are well-known cryptocurrencies, there are many other altcoins on the market that are much cheaper. These altcoins may offer opportunities for investors to make a profit in a falling market. It is important to thoroughly research and understand these altcoins and their potential for earning in a falling market to avoid any potential losses. By considering a diverse range of cryptocurrencies, investors may be able to capitalize on opportunities and make a profit even in a bear market.
When choosing an altcoin to trade in a falling market, study as much information about it as you can, and also use cryptocurrency aggregators. This way, you can check their ratings relative to other tokens, the amount of market capitalization and other relevant indicators.
Consequences of cryptocurrency market correction
A correction is a normal occurrence in any market. Without it, asset values would be so far from justifiable that investors would be in constant danger of an asset crash.
The correction makes the asset safer for the investor, as it returns or at least brings it closer to its real value. Of course, you have to look at each case because an asset's price can be deliberately influenced by a group of people. But in general, the correction is a natural and largely spontaneous phenomenon. Being sure that it is due to natural causes, you can not count on more or less reliable predictions.
For example, if we are talking about a promising and reliable asset, the correction is unlikely to cause a decline in the rate. If it is more unreliable, the risk of a trend reversal in the direction of falling increases. But a rate collapse following a correction will only occur if there are other reasons for it.
In the case of cryptocurrencies, a correction more often leads to a trend reversal. Sometimes because many people don't recognize it, they classify it as a downturn and thus provoke this event. But if there is no decline, then the crypto market correction leads to further growth, sometimes as rapid as the previous one.
Now you know what market correction means and how market correction work. Making money in a falling market is possible, but it can be challenging. Some strategies for earning in that market may be difficult to understand, so it is crucial to carefully study and research these strategies to avoid potential losses. It is important to remember that the market can be unpredictable, so it is essential to be prepared and knowledgeable about the various strategies available. By doing so, you can maximize your chances of making a profit even during the correction market.