08 October 2022 | ZebPay Trade-Desk
A market correction is a sharp but short-lived fall in price due to an overbought or overvalued market. It means a “pullback” from recent highs allows the market to digest the gains and move up a notch. If, after making a recent high, the market falls by 10 % or more, it is considered a market correction. However, the 10% figure is not a hard and fast rule. Some corrections are a 3% drop; others can drop as much as 20%. Market corrections of 5% to 10% are more common in cryptos. Corrections almost always occur when the economy is booming, as investors bid over-high asset prices, setting the stage for a “Mean-Reversion” as corrections bring prices back to more realistic levels.
Stock market corrections typically occur every two years, but as the crypto market is more volatile, price corrections tend to occur more frequently. There is no set timeline for crypto market corrections. Therefore, price corrections can occur over days, weeks or months. Sometimes, crypto market corrections can occur within a matter of hours. crypto prices are driven by several factors, all of which contribute to overall market volatility. As such, it can be difficult to pinpoint the exact time frame of a market correction.
Various reasons can trigger a correction in the crypto market, such as overzealous investors, regulatory uncertainty, or market-wide sell-offs.
Some of the more common triggers include:
- Excessive speculation and investor exuberance: When investors become too focused on a particular asset, they tend to push prices up too quickly, which can lead to an unsustainable bubble that eventually bursts and leads to a market correction.
- FOMO (fear of missing out): When investors see prices rising rapidly, they may jump into the market without proper research, creating a self-fulfilling prophecy where prices will keep rising simply because more people are buying.
- Hacked Exchanges: When a major exchange is hacked and loses a significant amount of investor funds, it can trigger a market-wide sell-off and call for a correction.
- Regulatory Uncertainty: Regulatory uncertainty surrounding crypto can lead to sell-offs and corrections. For example, prices fell sharply when China announced it would crack down on cryptos in 2017.
A little different from corrections are pullbacks which are temporary pauses or reversals in an asset’s overall value trend. In crypto, pullbacks are relatively common and can occur multiple times during an uptrend or downtrend. Pullbacks are generally considered a healthy part of the market cycle as they allow the market to digest gains (or losses) and reset before going higher (or lower). Crypto pullbacks mean that the temporary reversal only stops increasing or decreasing the value for a short period, after which the asset’s value reverts to its original behaviour.
A bear market is a prolonged period of falling prices, usually accompanied by widespread pessimism. In other words, it’s very similar to a market correction, but it lasts for a longer time. For a market to be considered a bear market, prices must fall 20% or more from recent highs. Like market corrections, this number is not set in stone and can fluctuate depending on market conditions. Unlike market corrections, which occur during periods of economic growth, bear markets generally occur when there is an economic downturn or a Stock market crash. A bear market in crypto can be caused by the same factors that trigger a market correction. However, they can also be caused by other factors such as political unrest or a natural disaster.
Read more: How to Avoid Falling Into a Bear Market Trap
The duration of a bear market can vary widely. Some bear markets last only a few months, while others can last for years. From 1947 to 2022, there were 14 bear markets in the US. In general, according to Investopedia, the average duration of a bear market can range from 1 month to 1.7 years. Around the world, bear markets last about ten months on average. However, there have been a few instances where bear markets have lasted much longer. For example, the “Crypto Winter” crisis lasted 415 days from 2013 to 2015, or just over a year.
Just like strategies for investing in a bull market (a period of rising prices), there are also strategies for investing in a bear market. Some common strategies are:
- Short Selling – This is when investors sell an asset they don’t own and hope to buy it back at a lower price so they can take advantage of the difference. However, short selling can be risky as there is no guarantee that the price of the asset will fall as expected.
- Buy Put Options – This type of insurance allows investors to sell an asset at a specific price within a specific period. If the price of the asset falls below the strike price, the investor can profit from the difference.
- Buy assets at a discount – Investing in general is a long-term game. While there will be ups and downs along the way, bear markets present an opportunity to buy assets at a discount.
- Do your research – When prices are falling, it’s more important than ever to do your due diligence and thoroughly research an asset before investing. . As prices fall, there will be many opportunities to buy assets at a discount. But as always, it’s important to remember that not all assets are created equal.
- Diversifying your portfolio – One of the best ways to weather a bear market is by diversifying your portfolio across different asset classes. This way, if one asset class is taking a hit, it will not severely impact your portfolio as a whole.
Read more: Crypto Trading Strategies – A Complete Guide
In general, the best way to navigate a bear market is to take a long-term view and remain disciplined in your investment strategy. And if you’re more cautious, there are strategies like short selling and buying put options that can help you take advantage of a falling market. During economic expansion, most price declines will be temporary setbacks or corrections. The trick is to stay invested in crypto during such corrections. Since the primary trends are likely to increase as the economy expands, prices will tend to follow them and eventually rise to new highs.
Like stocks, crypto prices rarely rise or fall in a continuous straight line. Rallies are likely to coincide with periods of consolidation where prices are slowly moving in either direction or through market corrections. Of the two, bear markets have a higher risk of destroying your investment portfolio, so learning how to spot them is important before a bear market happens. The first step is always to determine where the economy stands. This way you know how to react when prices start to fall. If you are unsure whether we are in a bear market, your best bet is to remain diversified and continue with your investment strategy.
By staying diversified, you’re less likely to lose everything, even if the market crashes. And by following your investment strategy, you’ll know when to buy and sell, regardless of market conditions. While corrections and bear markets can be discouraging, remember that in a healthy economy they are normal occurrences. If you can learn to distinguish between the two, you’ll be able to better manage them. In terms of recovery time, markets tend to recover from corrections faster, usually within a few months. Bear markets, however, demand a higher price in the markets due to their longer duration and greater magnitude of the price decline. Therefore, recovering from a recent bear market can take anywhere from several months to a few years.
Disclaimer : This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptos viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.