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Corrections are a natural event in any financial market, whether that’s crypto, stocks, or commodities. This happens when broader crypto prices decline by 10% from their prior peak. Unlike bear markets, corrections are often short-lived, allowing investors to buy the dip before the next upward movement.
Read on for a more definitive answer to the question: What Is a Crypto Correction? We explain why corrections happen, how to spot them, and what signals could be indicative of a more prolonged market crash.
What Is a Crypto Market Correction?
In simple terms, crypto market corrections see prices decline by at least 10% from their previous peak. This can relate to the broader markets or individual coins.
- For example, suppose the total value of all cryptocurrencies today is $2.2 trillion.
- The total value declined to $1.98 trillion a week later.
- This would be defined as a market correction, considering the total value dropped by 10%.
Similarly, suppose Bitcoin hits an all-time high of $75,000. It declined to $67,500 a few days later. This is another example of a market correction.
It’s important to note that market corrections must not exceed 20% from the previous peak. This would signal a more serious decline and potentially the start of a down market. What’s more, while market corrections are often short-lived, they can last for days, weeks, and sometimes months.
Ultimately, market corrections occur in all trading industries. Prices can’t rise indefinitely, which is why market movements go through ups and downs.
Why Does a Market Correction Happen?
We’ve now answered the question: What is a crypto correction? Next, you might be wondering why market corrections happen.
Many variables can influence a correction, including ‘profit taking.’ This simply means the markets have witnessed a prolonged price rally, and investors cash out a percentage of their portfolios to lock in the gains. This creates enhanced selling pressure and, sometimes, significant price declines.
Market corrections can also be influenced by broader developments, such as global events. For example, when China announced a blanket ban on crypto trading in 2021, most coins saw a rapid correction. This is because the news was negative for the wider markets, meaning sentiment temporarily turned negative.
However, the cryptocurrency markets quickly recovered, with the bull market lasting for another two months.
How Long Do Corrections Last?
There is no definitive timeframe for market corrections. That said, they’re typically short-term, often lasting for days or weeks. In rarer cases, market corrections can last for several months. However, this could be the start of a more serious bear market.
- For example, Bitcoin was priced at about $64,000 on August 26th, 2024.
- Bitcoin declined to under $53,000 come September 9th, a drop of about 17% in two weeks.
- However, Bitcoin had recovered to $64,000 by September 23rd.
- This means the market correction lasted for almost one month.
As mentioned, corrections can relate to broader market prices or individual projects. For instance, while the wider markets could be down, certain cryptocurrencies might witness growth.
Crypto Market Correction vs. Crash
We’ve established that market corrections typically see declines of 10-20% over a short timeframe. However, more serious price declines are referred to as a ‘crash.’ This can see prices drop by 20%or more within days or even hours. In most cases, crashes are motivated by broader events.
- An example of a crash is Bitcoin’s price collapse in March 2020.
- This aligned with COVID-19 being declared a pandemic.
- Alongside the stock market, Bitcoin’s price dropped by significant amounts, owing to fears about the global economy.
- Bitcoin went from about $10,000 to $4,000, shedding half of its value in just two days.
Crucially, the above crash was rapid, but the recovery happened over several months. In contrast, the vast majority of market corrections see a much faster recovery. What’s more, corrections are often softer, meaning the decline doesn’t happen as quickly as a crash.
- For example, Bitcoin was trading at just under $47,000 on January 9th, 2023.
- The Bitcoin price had declined to under $40,000 come January 24th.
- This means Bitcoin lost about 15% in two weeks.
- By February 15th, Bitcoin had not only completed its market correction but surpassed $51,000.
- This upward trajectory continued until March 14th, 2024, when Bitcoin recorded an all-time high of $73,750
Let’s summarize the key differences between a crypto correction and a more serious crash:
| Correction | Crash | |
| Typical Decline | At least 10% but rarely more than 20% | 20% or more |
| Timeframe | Usually lasts for days or weeks, and months in rarer cases | Declines occur rapidly, often in days. Recovery can be slower |
| Reasons | Profit taking, sentiment change, news developments (e.g. interest rates) | Often major global events like a pandemic or recession |
How to Recognize a Crypto Market Correction?
Crypto prices rise and fall as every second passes. However, knowing whether price declines are a sign of a market correction is crucial. This will help you act accordingly.
Let’s explore some of the ways you can evaluate a crypto correction.
Assess Price Decline
First, you’ll need to assess the price decline.
This requires two figures:
- The price during the most recent peak
- The current price
If the difference between these figures is 10% or more, it could be a market correction. For example, suppose Ethereum peaked at highs of $5,000 a few days ago. Today, Ethereum is priced at $4,500. This means Ethereum has declined by 10%, so it could be a market correction.
Evaluate Whether it’s a Broader Decline
Market corrections not only impact the wider crypto industry. But also individual coins. Evaluating whether it’s a local or broader correction is crucial. This ensures you can act accordingly.
For instance, suppose you’re holding a meme coin, which has declined by 15% in the past week. If Bitcoin has also witnessed a decline, then it’s likely a broader correction. This means the meme coin’s decline likely isn’t an internal issue. Rather, it’s because of a wider market drop.
Conversely, suppose Bitcoin has increased by 10%, while the meme coin has dropped by 15% over the same period. This could be a warning sign to exit that particular investment. After all, a strong Bitcoin performance should be replicated by altcoins, especially the best meme coins.
Analyze Overall Market Sentiment
Sentiment is another factor that can impact market conditions. This shows whether the wider markets are positive or negative about cryptocurrencies. Positive sentiment often results in a prolonged price rally. In contrast, negative sentiment has the opposite effect.
We like CoinMarketCap’s Fear and Greed Index in this regard. It represents sentiment from 0 to 100. The higher the Index, the more positive sentiment is (and vice versa).
Suppose the Index is currently at 80, illustrating overly positive sentiment. However, one of your crypto investments has declined by 12% in the past day. This could be more than just a crypto correction, considering broader sentiment is strong.
Look for Fundamental Developments
Market corrections are often due to fundamental developments, such as a negative news story. This is the easiest way to spot a correction. What’s more, it’s often the best way to capitalize on a correction, as most negative stories are short-lived. This means you can buy the dip (more on this shortly).
- For example, Silvergate Capital – a crypto-friendly bank, filed for bankruptcy on March 8th, 2023.
- On that day, Bitcoin traded at highs of $22,274.
- Bitcoin hit lows of $19,796 on March 11th, representing a market correction of 11%.
- By March 13th, Bitcoin was already trading at over $24,406.
- This means Bitcoin recovered its correction in just five days.
Market Correction Trading Strategies
Now that you know what can trigger a market correction, we’ll discuss suitable strategies. Not only to capitalize on them but to protect your portfolio from extended losses.
Buy the Dip
The best way to capitalize on a market correction is by buying the dip. This means investing in the best cryptocurrencies at a lower price. After all, market corrections are typically short-lived. This means you have conviction that the cryptocurrencies will recover once the correction is over.
- For instance, we mentioned earlier that Bitcoin dropped from $22,274 to $19,796 three days after the Silvergate Capital collapse was announced.
- Buying the dip would have secured an 11% discount when compared to three days prior.
- And, two days after making the purchase, Bitcoin was trading at $24,406.
- Therefore, in this example, you made gains of 23% in just five days.
Just remember, buying the dip doesn’t only work for broader corrections. It’s also a great strategy for individual holdings. For example, you could be holding a meme coin that has increased by 70% in just one week. Natural market dynamics require a short-term correction even during extended price rallies.
This is because, at some stage, early investors will begin cashing out their gains. If you’re a long-term believer in the respective project, the correction offers an excellent opportunity to buy more coins at a discounted price.
Deploy Stop-Loss Orders
Risk management is crucial if you sense a market correction. This means protecting your portfolio from a more serious market decline, such as a bear cycle.
- For example, suppose Bitcoin has declined by 5% in the past 24 hours.
- It’s not quite a market correction, but the decline is large enough to trigger concerns.
- You could deploy a stop-loss order at 10%.
- This means your Bitcoin will be sold automatically if its price declines by a further 10%.
The vast majority of exchanges and brokers offer stop-loss orders.
Short-Selling
A more advanced and risky strategy during market correction is to engage in short-selling. In a nutshell, this means speculating that the crypto’s price will decline.
And, if it does, you’ll profit from its downfall – even if it’s temporary.
- For example, suppose Ethereum has declined by 12% in the past week.
- You believe this is because of abnormally high network fees, making its ecosystem unattractive for traders.
- You believe this issue will be prevalent for several weeks, so decide to short-sell Ethereum at $4,000.
- It declines by a further 10%. This means your short-selling trade also makes 10%.
How to Short-Sell During a Crypto Correction?
You’ll need to trade derivative products to short-sell cryptocurrencies. The easiest option is perpetual futures, as they’re cost-effective and come without a settlement date.
One of the best crypto futures trading platforms is MEXC. It offers thousands of perceptual futures and commissions are 0% when placing limit orders. MEXC also offers charting tools, enabling you to find the perfect entry and exit points via technical analysis.
Dollar-Cost Averaging
Long-term investors should always dollar-cost average their crypto holdings. In theory, this makes market corrections somewhat irrelevant. After all, you’re buying the respective coins regardless of short-term pricing swings.
For example, suppose you buy $100 worth of Bitcoin every week. In one particular week, Bitcoin has declined by 15%. You would have bought Bitcoin anyway, so you’re capitalizing on the decline by default.
Conclusion
We’ve answered the question comprehensively – What is a crypto correction? In most cases, corrections are short-lived, often due to profit-taking or negative news development.
Popular strategies during a correction include buying the dip and setting stop-loss orders. However, corrections can turn into more serious market declines, so never assume a quick rebound is guaranteed.
