Crypto terminologies can be difficult to comprehend, especially for beginners. This article looks to discuss the major differences between a market correction and a bear market.
What’s a Market Correction in Crypto?
A market correction can be described as a sharp but brief price drop in response to an overvalued or overbought market. Therefore, when a market declines by 5% from the latest high, that is deemed a market correction. But it is worth noting that the 5% figure is not an established rule. There are corrections that can be drops of 4%, while others go as high as 25%. However, most corrections range between 5% and 10%.
Corrections usually happen when the economy is growing due to investors becoming overconfident, pushing crypto asset prices to exaggerated levels. At that point, corrections come in to bring prices down to realistic levels.
How Often Do Market Corrections Occur?
Corrections commonly occur every two years in the stock market but happen more frequently in crypto due to the high market volatility. That means corrections in the crypto market can happen in hours, days, weeks, or even months.
What Causes Market Corrections in Crypto?
Here are some of the factors that can trigger corrections in the crypto market:
Investor exuberance and excessive speculation: When crypto investors become too excited about a certain asset, they quickly push its price too high, creating an unmaintainable bubble that ultimately pops, causing a correction.
Regulatory uncertainty: When a cryptocurrency faces a regulatory attack, it can trigger investors to sell off their holdings, leading to a correction.
What’s a Bear Market in Crypto?
Similar to corrections, a bear market also involves price declines but lasts a bit longer. In addition, a bear market happens in times of economic recession or market crash as opposed to a market correction, which happens during economic growth.
How Long Can a Bear Market last?
A bear market can last for a few months or go on for several years, depending on various factors. According to Investopedia, most bear markets in recent years have lasted between one month and 1.6 years. The current crypto bear, which started in May 2022, is ten months old as of March 2023.
How to Build in a Crypto Bear Market
It is possible to make profits during bear markets. Below are some common strategies used:
Short-selling: This involves an investor selling an asset they don’t own and hoping to purchase it back at a relatively lower price in an attempt to pocket the difference. But shot-selling is considered highly risky because there are no guarantees that the asset’s price will decline as anticipated.
Purchasing assets at a discount: since investing is a long-term game, a bear market provides investors an opportunity to acquire assets at reduced prices.
Diversifying your portfolio: This is one of the effective strategies investors use to weather bear markets. Injecting funds in various asset classes shields you from losing all your investment funds because when one asset falls, the others could be gaining, thus helping you recover losses.
Buying Put options: This insurance type lets an investor sell an asset at a particular price within a specific timeframe. The investor can pocket the difference in case the asset drops below the strike price.