- Crypto market corrections and crypto bear markets have some key differences that investors need to be aware of.
- Investors can still grow their crypto portfolios during a crypto bear market.
- Investors should still practice caution as bear markets can have a big negative impact on investment portfolios.
The crypto market is perhaps one of the most, if not the most, volatile markets at the moment, and has been ever since bitcoin (BTC) launched back in 2009. Investors and traders have felt the effects of crypto’s volatility over the years, as the crypto market has experienced meteoric bull runs and catastrophic bear runs.
When prices in the crypto market fall, it is not always as simple as the crypto market just entering into a bear market. Sometimes, the crypto market is just facing a correction – forcing prices to retract.
There are some key differences between a crypto bear market and a crypto market correction, which this article will take a look at.
What is a Market Correction?
A market correction is defined as a short-term retracement in prices within a market after prices in the market have risen too quickly.
The majority of investors usually react negatively to a market correction as prices enter into a sharp, and often rapid, decline. This sharp decline in prices is usually a response to an overbought and overvalued market.
A small drop from recent highs in the market is healthy because it allows the market to digest the gains and build momentum for another leg up.
The Size of an Average Correction
Generally, a 10% or more drop from recent highs in the market is considered a market correction. However, this 10% figure is not set in stone, as some corrections are only a 3% drop. There are also instances where a correction is as much as a 20% decline in prices. In the crypto space, an average correction is between 5% to 20%.
Frequency of Market Corrections
Corrections almost always occur when the economy is expanding. The reason this is the case is because investors become overconfident and push asset prices too high, which sets the stage for what is known as a “reversion to the mean” – the process of corrections bringing prices back to more realistic levels.
Although the average stock market correction occurs every two years, corrections in the crypto market happen more frequently due to crypto’s highly volatile nature.
There is no exact timetable for crypto market corrections. Meaning, crypto corrections can either occur in days, weeks, or months. In some rare cases, a crypto market correction can happen in a matter of hours.
Several factors play a part in the prices seen in the crypto market, contributing to the crypto market’s overall volatility. With this in mind, it can be somewhat challenging to pinpoint the exact time frame of market corrections.
Reasons For Corrections
All of the factors that play a part in the prices in the crypto market means that there are also several reasons that can lead to a market correction in the crypto market. These reasons can be regulatory uncertainty, over enthusiastic investors, or market-wide sell offs. There are also other common triggers for a market correction in the crypto space.
Excessive Speculation
One of these more common market correction triggers in the crypto market is excessive speculation and investor exuberance. This is when investors get too excited about a certain class of assets or a particular asset and, as a result, push prices too high and too fast. These price surges create an unsustainable bubble that eventually pops – causing a market correction.
FOMO
Another common trigger for a market correction in the crypto market is FOMO, which is an acronym for the fear of missing out. When investors see that prices are rising too quickly, they may jump into the market without doing their due diligence of what they’re jumping into.
This creates sort of a self-fulfilling prophecy where prices continue to rise simply because there are more buyers.
Exchange Platform Hack
Sometimes, it’s not speculation and hype that can cause a market correction. For instance, an exchange platform getting hacked can cause prices in a market to fall. This is especially true for a major crypto exchange that loses a significant amount of investors’ money because it could ignite a market-wide sell off and subsequent correction.
Regulatory Uncertainty
As mentioned slightly earlier in this article, regulatory uncertainty can also trigger a market correction. Any time there is regulatory uncertainty surrounding cryptocurrency, a sell off may occur. A classic example of this is when price fell sharply in 2017 after China announced its regulatory crackdown on cryptocurrency.
What is a Pullback?
Pullbacks are slightly different when compared to corrections, and are temporary pauses or reverses in the overall price trend of an asset or prices in a specific market.
In crypto, pullbacks are relatively common and can happen several times during an uptrend or downtrend. Veteran traders and investors in the market welcome pullbacks since they allow the market to digest gains, or losses, and reset before moving higher.
Crypto pullbacks means that the temporary reversal in price trend will only increase, decrease, or stop for a brief period. Thereafter, the asset’s price trend will return to its original behavior.
What is a Bear Market?
A crypto bear market on the other hand is a prolonged period of falling prices. This period is also accompanied by widespread pessimism. Simply put, it’s like a market correction, except the prices continue to fall for a longer period.
For a market to be considered bearish, prices must fall by at least 20% from their latest highs. Similar to market corrections, this figure is also not set in stone and different bear markets may have varying magnitudes of price drops. This is all dependent on market conditions at the time.
One thing that separates bear markets from market corrections is that market corrections normally occur in times of economic growth, whereas bear markets occur when there is an economic recession or a stock market crash.
A crypto bear market can be caused by any of the same factors that trigger a market correction. However, there are also factors that can cause a bear market, including political turmoil or a natural disaster.
When it comes to the duration of a bear market, the length of the period may vary. Some bear markets last only months while others persist for a couple of years.
Between 1947 and 2022, there have been 14 bear markets in the US. Generally, the average length of a bear market can range from one month to 1.7 years. This is according to Investopedia.
Duration of a Bear Market
On a global level, a bear market has an average length of 10 months, give or take a few months. However, there have been a couple of instances where bear markets have continued on for much longer. Looking at the crypto market, an example of a prolonged bear market is the crypto winter crash of 2013 to 2015 that lasted for 415 days – just a little over a year.
How to Grow in a Bear Market
Bear markets are not necessarily a period where investors are unable to generate profits and grow their portfolios. Just as there are strategies for investing in a bull market, which is a period of rising prices, there are also strategies for investing in the bear market.
Short Selling
The first strategy that investors can use during the bear market is short-selling, which is when investors sell an asset they do not own and hope to buy it back at a lower price. Investors do this with the hope of profiting from the difference. However, short-selling can be risky, as there is no guarantee that the price of an asset will fall as originally anticipated.
Purchase Put Options
Another strategy to employ in a crypto bear market is to buy put options. A put option is a type of insurance that allows investors to sell an asset at a specific price within a certain time frame. Should the price of the asset fall below the strike price, the investor can profit from the difference.
Purchase at a Discounted Price
One thing that a bear market allows investors to do is to buy crypto assets of underlying intrinsic value at a discounted price. This is more a long-term strategy but definitely one worth mentioning. Even though there will be ups and downs in the market, a bear market can be seen as a broad crypto sale.
Building on the previous point, a bear market is the perfect time for investors to do intensive research without the hype and FOMO normally present in the crypto market. This will enable investors to better identify crypto projects of value.
Staking
For savvy investors that will not need to cash out of their crypto positions any time soon in the bear market, staking could be a great strategy to incorporate to grow their investment portfolios. With staking, the investor can grow their position in the crypto being staked and could even earn a passive income from staking.
In the next bull run, investors will not only have more crypto tokens and coins in their portfolios, but they can also enjoy the double benefit of having more crypto and the increase in crypto prices – all through the simple and low maintenance process of staking.
Portfolio Diversification
The last strategy that investors can implement during a bear market is to diversify their portfolio. This is one of the best and proven ways to weather a bear market, as different assets from different asset classes will not all perform the same – some will make a loss while others will generate a profit.
Bear markets and market corrections are a normal part of the investment cycle, so there is no need for investors to panic when they happen. Once investors are able to grasp the differences between both a market correction and bear market, it will be easier for them to navigate the markets when prices start rising again.
In general, the best way for investors to navigate through a bear market is by focusing more on the long-term than on the short-term, and remaining disciplined with their investment strategy. Should investors be feeling extra cautious, they can implement strategies such as short-selling and buying put options that can help them profit from a falling market.
In times of economic expansion, mostly all price declines are temporary pullbacks or corrections. The trick is to stay invested in cryptos during these corrections and pullbacks. Since primary trends are most likely to be bullish when the economy is expanding, prices will eventually follow suit and begin climbing to new highs.
Similar to stocks, crypto prices rarely move up or down in a continuous line. Every price rally will likely be followed by price corrections. In these correction periods, the prices will either move sluggishly in either direction.
When comparing bear markets with market corrections, investment portfolios can be impacted the most by bear markets. Therefore, it is essential to learn how to identify a bear market before it happens. To do this, investors can pay close attention to where the global economy is at, as this will give investors a better idea of how to react to falling prices.
If investors are uncertain of whether or not the markets are in a bear market, the best thing to do is to diversify their portfolios to reduce the impact of a potential bear market. Investors should also focus more on the long-term growth of their investment strategy and should remain disciplined when it comes to their investment approach.
To Recap
A bear market and market corrections are both periods wherein prices drop. The major difference between market corrections and bear markets is that bear markets are a more prolonged period of price drops. With this being the case, prices tend to drop a greater magnitude in a bear market than in a correction.
Investors can still grow during a bear market by employing strategies such as staking, buying put options or short selling. No matter if it is a bear market or a bull market, a diversified investment portfolio is advisable, as it allows investors to counteract the effect of falling prices, and lowers their risk of losing all of their money when the market does not go their way.
Market corrections normally occur every couple of hours, days, weeks, or even months. On the other hand, bear markets usually occur every 3 to 4 years, with crypto bear markets taking place more frequently due to crypto’s native high volatility.
Disclaimer: The views and opinions expressed in this article are solely the author’s and do not necessarily reflect the views of CryptoTale. No information in this article should be interpreted as investment advice. CryptoTale encourages all users to do their own research before investing in cryptocurrencies.
