Have you ever wondered what the terms market correction and bear market mean in cryptocurrency? Judging by the current market conditions, when Bitcoin is, say, trading at around $16500, the market can be said to have undergone a dip. But was it a market correction or a bear market condition? Well, that is something that you will get more clarity upon ahead.
But first, you should understand why these terms are used. The cryptocurrency market is highly volatile, making it hard to predict what direction it will take next. Whenever there is a decline in cryptocurrency prices, the market either goes under correction, or the volatility pulls it towards a bear market. In both cases, the strategies to prevent losses can be very different. That is why it is important that you learn more about these two terms and then create your strategy to handle them.
What is Market Correction?
You might have observed that 2021 was a golden time for the crypto market. The market type was highly bullish, and Bitcoin reached its all-time high of over $65000. It is safe to say that it was a critically high jump for the market, and some people even labeled the market to be overvalued. After November 2021, the market started to show a decline in the prices of crypto assets. For that market, the decline was not more than 10 to 12 percent. Similarly, a small decline in crypto prices to balance out overbought assets is known as market correction for a crypto market.
It is generally a response to a rapid increase in the prices of market types. People generally label market correction as a ‘pullback’ from a relatively higher price point. Since the crypto market has just begun to get a stronghold in the finances, a market correction is important for smaller players to invest at lower prices and gain profits with the bull run. Typically, a decline from 3 percent to 10 percent is labeled a market correction in cryptocurrency. The prices then stabilize and later start to increase again slowly. Market correction does the job of bringing the market back to a more realistic price point.
How Does Market Correction Occur?
For the cryptocurrency market, there is no sure-shot way to tell when a market correction will occur. The crypto market is highly volatile and does not follow any hard and fast rules for correction. Sometimes, the market correction occurs when the prices only jump by 20 to 30 percent, while at times, the market type tends to be bullish even for 100 to 200 percent gains. The market correction usually relies on when crypto whales and major investors think that the market is overvalued. Generally, market correction for a crypto market usually occurs within a few hours of a major price hike. There are several factors which crypto market correction depends upon. Let’s study what these factors are.
What causes market correction?
- Investor Exuberance: At times, big investors, especially crypto whales, tend to get overhyped about a currency and start buying in bulk. This pushes the crypto market to a relatively higher price This also sends an overbought signal to the market, a factor in a market correction.
- Sometimes people tend to feel that they may miss out on gains as the market rises. This, too, sends the market to an overbought situation, thus leading to a market correction.
- There have been cases when crypto exchanges got hacked, and the hackers started selling off investors’ assets. This, too, shall send the market into a relative correction.
- Major economic events like a country announcing support or a ban on the crypto market can trigger a market correction. For example, China announced a ban on cryptocurrency in 2017, which led to a market correction that year.
What is a Bear Market?
Talking about a pullback in prices of crypto assets, the bear market tends to be another market type as well. Cryptocurrency, a volatile subject, can undergo a steep decline in prices. This may lead to a sudden loss of investors’ money. In technical terms, a bear market is the ‘prolonged decline in cryptocurrency prices which is accompanied by pessimistic approach from the investors.’ It can be considered an extended market correction. Whenever the market falls by 20 percent or more, a bear market is announced for the investors to be aware of and make an investment strategy accordingly. The market in 2022 was strongly bearish, which made investors cautious about their investments. A bear market generally sends the economies relying on it toward a recession. A bear market may age about one to twelve months: sometimes, a bear market for the stock market has stayed as it is for one and a half years. Even the crypto market fell for nearly 415 days between 2013 and 2015.
What Are The Causes of a Bear Market?
- One of the biggest causes of a bear market is the world’s political, civil, or economic unrest. The worldwide war and economic recession in 2022 caused the crypto market to fall with a bearish approach. The market was swept by $2 trillion in market capitalization.
- A public health crisis like the Covid-19 outbreak can also cause a bear market. In such cases, people usually take out their investments to use for health services.
- Announcement of overly critical financial policies by a major world economy can also lead to a bear market in multiple cases.
Now that you have learned about the terms crypto market correction and bear market, you can understand that both are related in some ways. When the price pullback is around 10 to 12 percent, a market correction is announced, but as the prices fall by more than 20 percent, a bear market is announced. The recovery time from a market correction is considerably less than what it takes to recover from a bear market.
You should seek resistance and support for crypto assets during both situations to improve your investment strategy. Moreover, being cautious during such price declines is important to prevent losses. So, you should keep an eye out in the market to be aware of a market correction and a bear market.