The difference between a correction and a crashin crypto is that corrections are part of a market cycle, while crashes result from external factors, such as panic selling. For European investors, it’s important to distinguish between a structural market failure and a healthy retracement. Here we break down what a crypto crash or correction is.
- A correction is a healthy short-term price drop while a crash is a sudden price change triggered by external factors.
- Crypto markets are sensitive to news and other external factors.
- Corrections happen when an asset is overbought while a crypto crash is driven by external factors that hinder investor confidence.
What is a market correction in crypto
A correction in crypto occurs when demand from investors peaks and the asset’s price gradually declines. Corrections are healthy price actions when the price of an asset like Bitcoin or other cryptocurrencies drops between 10% to 20%. Corrections allow investors to continue to accumulate until fresh capital enters the market, pushing the price higher. What’s also important to note is that corrections can be short- or long-term and follow the same principles, giving bullish traders time to consolidate before the price potentially resumes its rise.
What causes a correction in crypto
Corrections are part of price action movements and happen when buyers reach strong resistance levels. They also appear when trading volume begins to shrink. From our experience, corrections also indicate that investors are taking profits and repositioning their portfolios, or awaiting new capital to enter the market. Common triggers in corrections also include negative discrepancies between an asset’s price and momentum indicators, such as the Relative Strength Index (RSI).
What is a market crash in crypto
A crypto crash occurs when the market experiences extreme volatility, with Bitcoin or other crypto prices decreasing rapidly due to external factors. Past market crashes include the FTX or Luna scandal, which are characterized as a black swan event. When markets drop by more than 20% in a single day, traders call it a crash. However, recent tariff announcements that saw Bitcoin lose more than 10% were not characterized as a crash.
In a market crash, prices move rapidly as investors withdraw funds, shift to risk-off assets, and seek ways to protect their portfolios. This is the result of structural failures in the system. A market crash is driven by news and macroeconomic factors.
Why do market crashes happen in crypto
A market crash occurs due to significant macroeconomic factors, driving investors to seek safe havens and avoid liquidation. These crashes happen quickly as investors exit positions en masse, with retail traders often exacerbating the situation through panic selling. Such events are typically triggered not by trading patterns but by factors that undermine trust, such as major hacks, regulatory shifts, or policy changes that disrupt economic stability.
Difference between crash and correction in crypto
There are a few differences between a crash and a correction in crypto. A crash happens without previous notice or any indication that the price could drop. It’s also characterized by declines of more than 20% due to panic selling among institutional and retail investors. A market correction can occur over a couple of weeks or months and is seen as a healthy process, as it provides more fuel for crypto to continue its rally.
Corrections are often welcomed by investors who understand market dynamics, whereas a market crash can undermine market integrity and prolong periods of low investor confidence. A correction is typically short-term, lasting a few weeks before prices recover. In contrast, a crash can lead to a bear market that lasts for months or even years.
What makes the crypto market go up or down
Market price fluctuations are driven by external factors, technical details, and investor confidence. While markets don’t always follow identical patterns, they often share similarities that help traders identify potential trends. These trends are influenced by investor activity, including trading volume, momentum, confidence, and narratives, all of which shape short-term price movements. Additionally, political and macroeconomic events play a significant role in driving price changes by shaping how investors perceive risk.
For example, the crypto crash in April 2013 saw Bitcoin’s price plummet by 73% in just 24 hours due to the shutdown of a major crypto exchange. Similarly, President Trump’s tariff announcements led crypto markets to gain and lose about 10% within a single week.
Ultimately, crypto markets are highly sensitive to news and, as risk-on assets, heavily rely on investor confidence.
What to do when markets crash or correct
When markets are volatile, investors need to determine whether external factors drive price movements or if crypto has peaked. This understanding helps them allocate funds more effectively. Here are some strategies to consider in such situations.
- Don’t Overthink: Avoid checking your portfolio obsessively every day. Emotional reactions often lead to poor decisions.
- Stay Diversified: Spreading capital across different asset classes reduces the impact of a downturn in any single coin.
- Use Stop and Limit Orders: These tools help automate your strategy, protecting you from heavy losses during sudden drops.
- Identify Opportunities: A market correction can be an excellent time to increase your position in high-conviction assets at a lower price.
Master the market cycles
Navigating a crypto crash or a correction requires a lot of experience and a clear head. Even experienced traders sometimes trade emotionally when large portions of their portfolio are in the red; however, it’s important to understand the distinction between the two and identify opportunities others see only as risk.
Regardless of whether you are an experienced trader or simply starting out, any movements in the market will surely create some uncertainty. For investors who want to remove emotion from trading and generate passive income, regardless of market volatility, Yieldfund offers three investment plans with annual returns of up to 60% and weekly payouts.
FAQ
Which apps offer real-time alerts for crypto market corrections?
Most major trading platforms allow you to set price alerts for when prices drop below a certain level. In the event of a crypto correction or crash, you can enable notifications to trigger when Bitcoin hits a specific price.
How to set stop-loss orders on crypto trading platforms in a correction?
On your exchange’s trading interface, select the “Stop-Loss” or “Stop-Limit” option. Enter the “Stop” price (the trigger price) and the “Limit” price (the price at which you are willing to sell). This automatically sells your asset if it falls to a certain level, capping your potential loss.
How often do market corrections occur?
Corrections are more frequent in the crypto market than a crash since the market is inherently volatile, and they occur after a significant rally or an all-time high to give the market time to cool off.
Are crypto crashes often?
While volatility is common, full-blown crashes are less frequent. They typically happen during periods of extreme global economic stress or major industry-specific failures.
What does correction mean in crypto?
In the context of a broader bull market, a correction signifies balance. It indicates that the asset was perhaps overbought and needs to establish a new support level. Think of it as a pause for breath during a marathon rather than the end of the race.
