Cryptocurrency markets

What to do during a correction in the cryptocurrency market - buy or sell?

What to do during a correction in the cryptocurrency market - buy or sell?
Table of contents

    1 Bitcoin determines the trend of the entire crypto market
    2 What is a market correction?
    3 How does a correction take place in the market?
    4 What actions to take during a market correction?
    5 Pros and cons of investing during a market correction

Benjamin Franklin once said that two things are inevitable in life: taxes and death. With the advent of cryptocurrencies, another inevitable thing has appeared in the modern world: volatility.

As you know, cryptocurrency prices fluctuate a lot. Sometimes the market rises, sometimes falls, often the direction of the price changes in a matter of minutes. You can go to bed, and wake up, find that the cost of everything has changed dramatically. Volatility has always been inherent in crypto assets - ever since (a little over ten years ago) Satoshi Nakamoto created Bitcoin.
Bitcoin determines the trend of the entire crypto market

Bitcoin holds a special place in the cryptocurrency community. As a trailblazer, the father of cryptocurrencies has consistently maintained its leading position in market capitalization and has a decent share of the entire cryptocurrency industry.

The stable domination of bitcoin in the market leads to the fact that the rise or fall of its price affects the value of other cryptocurrencies. It is noted that altcoins lose or grow in price sometimes even more than bitcoin. Due to its leading position, it is Bitcoin that most often acts as a catalyst for volatility in the cryptocurrency market.
Here's an example: following the recent sharp drop in bitcoin, the entire cryptocurrency market underwent a correction. After reaching an all-time high of $ 64,800 on April 14, 2021, Bitcoin lost more than 33% of its value by May 18. As a result, the market as a whole lost $ 300 billion.

Prior to this, Bitcoin was in a bullish phase. The cryptocurrency rose by about 1,500%, from $ 3,800 in March 2020 to a peak in April 2021. After such a strong trend, many began to doubt the possible correction of the market and the onset of "crypto winter".
What is a market correction?

A market correction occurs when an asset loses a significant portion of its value in a short time. As a result of this change, the number of buyers and sellers in the market is leveled. This price change is called a correction, because the price of the cryptocurrency returns from an abnormal jump to a long-term established trend.

The adjustment can take place in the markets of individual cryptocurrencies (such as Bitcoin, ETH, BNB) or in the cryptocurrency market as a whole. The term "correction" has traditionally been used to describe the situation in the stock and securities market, but now it is also applicable to cryptocurrencies.

Typically, a market correction is a sustained fall in the price of a digital asset by at least 10% from its last peak. And although we use certain indicators when trying to predict a correction, in reality, no one knows for sure what exactly will provoke it next time. We also cannot predict when it will start, end, or how much value will be lost before it ends. Nevertheless, the reason for the correction can be understood by analyzing recent market events.

The recent correction in the cryptocurrency market may be associated with a sharp drop in the price of bitcoin. Three days after a new all-time high of $ 64,800 on April 14, the bitcoin market corrected and depreciated by 12%. As expected, the wave effect happened: traders and investors began to sell their altcoins quickly to avoid losses.
What to do during a correction in the cryptocurrency market - buy or sell?

What to do during a correction in the cryptocurrency market - buy or sell?

The total market capitalization of cryptocurrencies has dropped 13% this week (about $ 310 billion). According to CoinMarketCap, the market fell from $ 2.2 trillion to less than $ 1.9 trillion as a result of the fall.

It has not yet been determined exactly what caused the correction, but several factors could have influenced the decline. One of the frequently cited reasons is power outages in those regions of China where mining farms are located, which led to a significant drop in the overall network hash rate. It is also possible that the market is simply too overheated and needs to be corrected.

The correction can be caused by other reasons, including: technical factors, liquidity and market turnover, news, changes in the regulatory framework, political changes and much more. It is difficult to single out one main reason, whatever the correction.
How does a correction take place in the market?

Corrections in the cryptocurrency market are the opposite of a bullish trend (periods of sustained increases in cryptocurrency prices).

As a result of price increases over a long period of time, a digital asset may become overvalued. When demand for an asset ultimately weakens and supply increases, the market corrects.

At this stage, many traders and investors sell their assets to lock in profits. Sometimes a correction can be amplified by news and other external factors. The first wave of sales often leads to the fact that other investors sell their assets, which causes the price to fall further. The decline is supported by subsequent sell-offs until a level is reached where demand is strong enough to support the amount of sales.

During a bullish trend, several corrections can occur, during which supply and demand equalize according to the market value of the cryptocurrency. Thus, several corrections preceded Bitcoin's recent all-time high of almost $ 64,000 in April 2021. Every time the price of Bitcoin hit record highs, there were small corrections. The asset lost about eight percent of its value and then continued to grow. Ethereum also experienced a correction after hitting the $ 1,926 mark in February 2021.

As a rule, corrections are followed by a recovery, and after a short decline in prices, the bullish trend continues in the market. However, a prolonged correction could lead to a longer period of decline, referred to as a bear market. In a bear market, cryptocurrency prices can fall by 50%, and possibly more. Bitcoin's all-time high of $ 20,000 in December 2017 resulted in several adjustments that eventually turned into a two-year bear market.
What actions to take during a market correction?

For some investors, a 10% decline in the value of a cryptocurrency portfolio is already enough cause for concern. If you are a short-term investor or day trader and trade with leverage, the adjustment can seem fatal to your positions. If you are not an expert in trading, then instead of “leveraging”, you should first realize that corrections are inevitable, and then think over further actions: hold positions or trade further and make a profit.

Emotional decisions are not uncommon, but should be avoided. Corrections are constantly taking place on the crypto market, but they do not always lead to bear markets. Rather than selling on a fall, some long-term crypto investors prefer to “go”, that is, to hold their crypto assets.

Protecting a cryptocurrency portfolio from the effects of corrections is challenging, but still doable. Since you can't pinpoint the beginning, end of a correction, or its transition into a bear market, it's a good idea to just have a plan of action. The plan does not need to be very detailed, but it should prepare you for future market corrections.
Below are several ways to get the most out of crypto assets during a correction:

    First, you can set a stop loss or stop limit in case prices fall. This will allow you to exit the market before your portfolio has lost too much of its value. These market orders are triggered when the price of an asset reaches a certain price level you set. We recommend that you check your orders from time to time to ensure that they are consistent with the current market situation.
    Secondly, if you are a long-term investor in cryptocurrencies, you can use your assets in investment products and financial management tools to generate passive income. Take Binance Earn for example. With Binance Earn, you can open a deposit, stake coins, or even become a liquidity provider in the DeFi markets, earning passive income from bitcoins, stablecoins, altcoins and even fiat currencies.
    The third option is to convert your cryptocurrency savings into stablecoins in order to wait out the correction in them. Once the correction is complete, you can convert your assets back to their original cryptocurrencies. Price alerts will help you prepare and implement this strategy. Please note that there are risks involved in doing this, so do your own research before deciding.

In general, market adjustments are not to be feared. If you are ready for them, you are less likely to panic when they happen. Without proper preparation, you will prepare yourself for failure.
Pros and cons of investing during a market correction

Investing during a retracement can be successful or unsuccessful. It could be a huge mistake or the best decision of your life. It all depends on what happens after the correction.

Bitcoin's all-time high in December 2017 was followed by a correction that gradually turned into a bear market. Investing during this correction would be a mistake. Those who invested then either waited years before they could make a profit, or ended up fixing a loss. Waiting for the market to recover this long can take its toll on your emotional and mental health.

At the same time, a correction can be a great buying time. The famous “buy the dip” quote in cryptocurrency circles suggests that it is necessary to make the most of the correction period by buying coins at relatively low prices. If things go well, you can gradually build up a cryptocurrency portfolio that is likely to be worth more later on.

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