Market Correction and Crypto Bear Market

Important points:

• A market correction is usually defined as a decline of between 10% and 20% and can be attributed to the asset’s expanding economy.

• A bear market is an extended period of time when asset prices decline by 20% or more, and is usually accompanied by widespread negative market sentiment.

• The main difference between a bear market and a correction market is the depth and duration of the decline.

• The market has a short time to recover from a correction and a long time to recover from a bear market.

Market correction and bear market are terms that describe periods of price decline in the crypto market, but they are technically different. A correction is a sharp but short-term price decline after a recent large price increase. This can happen because the asset economy expands and investors overbuy the asset, pushing the price too high. A bear market, on the other hand, is a period of significant price declines, usually accompanied by widespread negative market sentiment.

Knowing the difference between a bear market and a market correction can help you better assess current market trends and plan your investment strategy based on your risk tolerance level and investment objectives.

What Happens During a Market Correction?

A crypto market correction is a short-term price drop in response to an overbought or over-sold market. A market correction is called when the market has fallen more than about 10% from its recent high. A threshold of 10% is not a hard upper limit. Some markets have corrected the 3% decline, while others have recorded corrections of up to 20%. However, 5% to 10% adjustments are more common in traditional finance like equities.

Unlike corrections in traditional markets, corrections in cryptocurrency markets are usually more severe. In addition to the volatile nature of cryptocurrencies, cryptocurrency modifications are similar to their traditional financial counterparts. So it’s not uncommon for cryptocurrencies to see price corrections of almost 20%. In general, alternative coins (altcoins) have recorded sharper corrections than Bitcoin, which has experienced multiple sharp corrections throughout its 12-year history.

Market corrections often occur when the economy is growing or during a bull market. During this time, market participants express overconfidence, mostly spreading good vibes and pushing prices to the ceiling. This sets the stage for a pullback to the average price and the correction brings the price levels back to realistic values.

Frequency of market corrections

In traditional finance, adjustments are typically made every two years. However, price corrections occur more frequently in the crypto space due to cryptocurrency market volatility.No definite duration for cryptocurrency market correction – Remediation can take days, weeks, or months.

market correction trigger

Markets can experience corrections without catastrophic events. As you can see in the list below, some of the triggers for corrections are related to reduced market participation.

Low demand in a period of high asset supply

The most common cause of market corrections is a decline in market demand in the face of high asset supply. Usually, the price can only continue to rise if more market participants invest in the asset. If a potential investor decides the price is too high, sell orders will outpace buy orders, leading to a healthy market correction.

swing trader taking profit

A swing trader or day trader is a short-term trader who invests in assets for short-term profits. When these traders short a substantial amount of their investment, they can put pressure on the price of the asset.

High level of leverage liquidation

Leverage is borrowing assets from an exchange or lending protocol to enhance your trading position. Due to the volatile nature of cryptocurrency prices, there is a high probability that you will lose your position (i.e. be liquidated) if the price of the asset goes against your plan. Widespread liquidations across markets could trigger a correction.

short-term speculative bubble

A parabolic short-lived ascent in the crypto space cannot be justified. Regardless of the cryptocurrency project’s potential and fundamentals, there comes a time when investors want to exit. If the price of a crypto asset rises significantly and rapidly, there may be a correction as investors seek to profit.

Market Correction and Market Crash

Market crashes generally leave more serious consequences than market corrections. Crashes are usually accompanied by a sharp drop in the market, although a fix can take days or weeks. Since cryptocurrencies are more volatile, tokens can experience rapid market declines of 20% or more during a crash. Additionally, tokens with smaller market caps tend to experience larger declines than those with larger market caps.

Cryptocurrency crashes tend to be triggered by major news and macroeconomic data. For example, when the World Health Organization (WHO) declared his COVID-19 a global pandemic, the price of BTC fell by almost 40% within his 24 hours. Another classic example is in 2011 when BTC crashed from his $32 to his $0.01 after news of the Mt. Gox (the biggest exchange at the time) hack.

Market sentiment during a crash is different from sentiment during a correction. On the one hand, cryptocurrency investors express a lot of fear and uncertainty during market crashes. However, the fix does not cause widespread panic. Prices can bounce back after a crash, but a deep drop can trigger a bear market. In particular, declines of more than 20% over months or years are drawn out.

What Happens in a Bear Market?

As mentioned earlier, a bear market is an extended period of price decline. The market price falls by more than 20%. There is generally widespread negative market sentiment, accompanied by widespread fear and uncertainty. A bear market is similar to a correction, only that it lasts for a long period of time. 20% is the threshold, but bear market tokens, especially in crypto, can plunge up to 90% from recent highs.

During this period, the market experiences occasional ‘relief rallies’, but the general trend is worsening prices. These markets are characterized by widespread negativity and uncertainty. For example, terms like “crypto is dead” and “crypto bubble” are starting to trend on social and mainstream media.

Eventually, investors realize the assets are worth a lot and start accumulating, officially ending the bear market.

At Bear Market…
know what #cryptocurrency You own it and you know why you own it!

— CoinGecko (@coingecko) June 28, 2022

In a normal scenario, investors might be bearish on some assets, but this negative situation could only affect some markets. However, when the market becomes bearish, almost all assets start to decline even if they are broadcasting positive news. Bear markets occur during recessions and crashes, as opposed to rampant market corrections during periods of economic growth and bull markets triggered by FOMO and overconfidence.

What are bear market triggers?

Bear market triggers often vary, but generally economic slowdowns, expanding market bubbles, global pandemics, wars, geopolitical disasters, and fundamental paradigm shifts in the economy are all factors that can trigger a bear market. There are some major factors. Indicators of a deteriorating economy include falling employment rates, declining purchasing power and productivity, and sharp declines in business profits. In addition, economic government intervention could revitalize bear markets.

For example, rate hikes can trigger bear markets. Likewise, a drop in investor confidence could also signal the beginning of a bear market. Market participants often choose to let go of positions discreetly if they have a strong feeling that something is about to happen. This was seen in the event of the FTX collapse, when a surge in customer withdrawals made it clear that the company lacked sufficient reserve assets to meet customer demand. A fall in FTX won’t trigger the current crypto winter, but it could magnify a crypto bear market.

How long can the bear market last?

The length of bear markets varies greatly. Some last for months, others take years. For example, since 1947, US stocks have had his 14 bear markets. These bear markets last from a month to over a year and a half, with bear markets lasting an average of 289 days, just over nine months. However, there are a few bear market examples where it took longer. For example, in 2013, the cryptocurrency market experienced one of its longest bear markets, lasting 415 days.

Bear Market vs. Recession

Bear markets and recessions can be closely related, but they are usually triggered by separate (albeit related) activities. This is because although the stock market and the economy are often related, they are disparate financial systems. A recession is an economic meltdown characterized by at least two consecutive quarters of deterioration in Gross Domestic Product (GDP). A recession can occur when:

• Lower consumer confidence leads to lower spending

• Dismal performance leading to high turnover.

• high interest rate

• real estate and credit crisis

On the other hand, a bear market occurs in the stock market and the virtual currency market. A bear market usually begins when a decline in returns forces an investor to stop investing, causing even more pessimism and bringing negative feedback his circle. The stock market is often the main economic indicator, and a bear market could indicate an impending recession.

Conclusion

In summary, the market correction and comparison to the bear market are as follows:

Markets tend to recover from corrections faster than bear markets. This is because bear markets are usually long periods of time and are accompanied by large price declines. It may take months or even years for the market to recover, but it will eventually return to its previous highs.

Cryptocurrency bear markets and corrections are scary, but they are a normal part of the investment process. Understanding the difference between a bear market and a market correction can help you navigate the market better and make informed investment decisions.

Josiah Macori

Josiah is a tech evangelist passionate about helping the world understand the concepts of Blockchain, Crypto, NFTs, DeFi, Tokenization, Fintech and Web3. His hobbies are listening to music and playing soccer. Follow the author on Twitter @TechWriting001