Benjamin Franklin famously said that “two things are inevitable in life: taxes and death”. In the crypto world, one thing is certain to be inevitable: volatility.
The great American founder Benjamin Franklin Benjamin
Coin prices are known for their high volatility. Sometimes the market rises, sometimes it even falls within minutes. You can go to bed and wake up with amazing price changes faster than your ex turns over.
Since Satoshi Nakamoto created Bitcoin more than a decade ago, volatility has been a familiar aspect of the cryptocurrency market. This is also one reason the SEC used an excuse not to approve the Bitcoin ETF.
Bitcoin has played an important and leading role in the crypto community. As a pioneer in the market, King of Crypto has maintained its leading position by market cap and is of great value throughout the crypto industry.
As a result of this continued dominance, when Bitcoin rises or falls, it has a ripple effect, or dominoes, on altcoins. Altcoins have been observed to rise and fall even more than Bitcoin. Bitcoin’s dominance in the market makes it a common catalyst for volatility in the crypto industry.
To take an example, when Bitcoin recently suffered a sharp drop in prices, the market also saw a correction. After Bitcoin hit an all-time high of $ 64,800 on April 14, 2021, Bitcoin lost over 35% in value on May 19. The market lost over $ 300 billion in the process.
Before that, Bitcoin had a notable bull run. King of Crypto saw an increase of around 1,500% from $ 3,800 in March 2020 to ATH in April 2021.
What is Market Correction?
A market correction occurs when an asset loses a significant portion of its value in a short period of time. This behavior adjusts and balances the forces of supply and demand in the market. We call this price change a correction because it takes the price from an unusual increase back to a long-established trend.
Typically, a market correction is a continuous decrease in the price of an asset by at least 10% from its last high. While we can use trading indicators to make predictions about when corrections can occur, nobody really knows exactly what will trigger them. Nobody can predict when they will start, end, or how much value will be lost until the curtain falls.
However, there will be some news that will be attributed and blamed. The case where Tesla suspends Bitcoin payments and Elon Musk alludes to the recent BTC sell-off is an example. Another common reason is power outages at Bitcoin mining locations in China, which significantly reduces the network’s hash rate.
Or it could simply mean that the market is too excited and needs a correction to rebalance. As normal as a river is sometimes full and sometimes empty, life has its ups and downs.
Many other factors can affect the correction, such as technical factors, market liquidity and circulation, breaking news, changes in regulations and policies in major countries. Therefore, it is difficult to determine the exact reason for an adjustment.
These things tend to legitimize the “why the market is correcting”.
How do market corrections work?
The crypto market correction is the opposite of a bull run that is within a sustained bull phase of the market.
If a digital asset experiences a sustained bull run, it can become overvalued. Ultimately, demand for the asset weakened and supply increased, causing a correction in the market.
At this point, many traders will sell their stocks to take profits or stop losses. Sometimes the correction can be amplified by news and other external factors. The initial sell-off often leads other stakeholders to take similar action, which further drives the price down. This repetitive situation would maintain the downward momentum until it reaches a price point where demand is strong enough to withstand the selling pressure.
A correction could occur during a bull run as supply and demand adjust to the market valuation of the cryptocurrency. Several corrections were made before Bitcoin hit its recent all-time high of $ 64,800 in April 2021. There were minor corrections as Bitcoin price rose to an all-time high. The coin lost about 8% of its value before price resumed its upward momentum. Ethereum has also seen a correction after hitting $ 1,926 in February 2021.
Corrections are usually followed by a rally, with the market continuing its upward momentum after a certain loss of value. However, if it persists, the market correction could result in a prolonged period of decline known as a bear market. When the market falls, the coin price can drop 50% or even more. Bitcoin’s $ 20,000 ATH in December 2017 resulted in several corrections that eventually turned into a bear market that lasted two years later.
What should you do in a correction market?
A 10% drop in the value of the crypto portfolio is enough to make some investors nervous. If you are a day or margin trader, futures and even a small adjustment can burn out your account, depending on the leverage you are using. Unless you’re an expert in trading, it is best to understand that corrections are inevitable rather than taking a margin call, and making an early decision to stop or limit your losses is crucial before other bad things happen in the future.
One thing is certain in the market: no one can predict volatility, and often it is always worse than you or “your expert” think.
It is easy to make hasty decisions based on emotions, but you should try to avoid it. Corrections take place in crypto markets, but they don’t always lead to bear markets. Rather than selling while prices are falling, some investors will choose to “die” over the long term.
Protecting your portfolio from the effects of market corrections can be challenging, but not impossible. Since you can’t tell when a correction will start, end, or turn into a bear market, a backup plan is not a bad idea. It doesn’t have to be complicated, but it will help you prepare for future market corrections. Here are a few ways you can make the most of a market correction:
First, you can place a stop-loss or stop-limit order to deal with falling prices. These allow you to exit the market before your portfolio loses too much. These market orders are triggered when the cryptocurrency reaches a certain preset price. You should monitor them in real time to ensure that they are relevant to the current market situation.
Second, if you are a long-term crypto owner, consider putting your crypto in investment products and financial management tools for passive income like DeFi, savings, loans, or staking. Its interest rate is much higher than the bank rate.
Other options include selling stablecoins to avoid a correction. Once the customization is complete, you can convert your assets back into the original cryptocurrency. This will help you increase your coin inventory.
In general, don’t be afraid of market corrections. If you plan for their “certainty” you are less likely to panic when it happens. If you are not prepared, prepare for failure.
Advantages and disadvantages of investing during the market correction
Investing during a market correction can succeed or fail. It could be a big mistake and it could also be the best decision you ever made, it all depends on what happens after the adjustment.
Bitcoin’s all-time high in December 2017 was followed by a slow correction and then turned frog-like into a bear market. Many of them had to cut their losses if they could not continue. Because waiting long for the market to recover can affect your emotional and mental health. This is why so many people gave up on the 2018 crypto winter and never came back. In fact, for them, this is a scam that they unfortunately engage in.
The classic frog cook syndrome on the market, it slowly boils up your account anytime.
However, corrections can present great opportunities for investors. The famous saying “Buy the Dip” in the crypto community comes from the fact that one can make optimal use of a market correction by buying at relatively low prices. If all goes well, you can slowly build a more rewarding crypto portfolio in the future. This is a method commonly used by Price Average (DCA) investors. Statistics show that with disciplined application, you can make big profits even in a bear market.
According to Academy Binance
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