In what ways can an investor tell if the market has corrected or if a bear market is brewing? Usually, investors have a hard time distinguishing between the two, and the psychological toll of watching the market decline day after day can cause them to make poor decisions.
Unfortunately, market fluctuations and extreme investor behaviour changes are typical in traditional stock trading. However, with crypto still in its infancy, we are still learning how significant market changes affect investors and how long the rebound period might be.
This article will look at the difference between a market correction and bear market and how these terms relate to the current crypto market situation.
What is a market correction?
A market correction is when the price of a crypto asset is temporarily reduced after spiking in value. This is done to give the market time to correct itself and absorb some of the gains. Market corrections are necessary to maintain balance and stop investors from pushing the stock price too high.
In traditional stock trading, market corrections happen around once every two years. However, with crypto, we are still learning about how long market corrections will last.
Why might a market correction occur in a crypto market?
There are several reasons why a market correction might occur:
- Investors may become infatuated with a coin, and as a result, they will push the value to an unsustainable high, ultimately leading to a market correction.
- Crypto cyber attacks can cause people to panic and sell, leading to a market correction.
- Global events such as the US launching its crypto coin can lead to people selling their crypto assets, leading to a market correction.
As we can see, the reasons for market corrections are varied, and most of the time, they have little to do with the asset itself, rather than market conditions such as investor behaviour.
What is a bear market?
Similar to a market correction, a bear market refers to a period of time where the value of a stock price falls (usually around 20%).
Bear markets are generally not seen as a good thing and will usually occur around the time of a recession or significant economic turmoil.
While it’s easy to predict how long a bear market will last in traditional stock trading, crypto bear markets are harder to judge. Crypto is volatile, and we have a long way to go before fully understanding it. So, estimating how long a dip in the market will last is almost impossible at this stage.
However, there are some things you can do during a bear market to diversify your assets and boost your portfolio.
What to do in a crypto bear market?
We are currently in a crypto bear market, which has led many crypto investors to panic and sell off their assets at a fraction of the price they paid. However, this is something most investors will come to regret.
Bear markets are not all doom and gloom, and there are several ways investors can profit from a bear market.
- Stay on the lookout for assets that are falling but have the potential to rebound in the future. Like traditional investing, buying low and selling high is a time-tested strategy that has proven fruitful in a bear market.
- Look to diversify your assets. When the market performs well, it’s easy to stick with what you know. However, during a bear market, you have the opportunity to branch out and start investing in other areas.
- Short selling. You sell an asset you do not own and repurchase it for a fraction of the price and profit from the difference. This method does not guarantee success and can be a gamble if you are not confident in the value of the asset dropping.
- Buying a put option is insurance that allows you to sell an asset for a specific price in a certain time frame. So you can profit from the difference if your asset drops below the price threshold.
- Use crypto-earning services. While waiting until the market stabilises, you can allocate your assets to earn rewards in crypto-renting or staking services. In this way, you will gain interest to your crypto while hodling until the prices go up gain.
Advice for crypto investors during market corrections and bear markets
There is no hiding the fact that we are enduring a difficult time in the evolution of crypto trading, with assets such as Bitcoin and Ethereum dropping drastically over the past 18-24 months.
However, if we were to look at the history of any financial market, we would see similar patterns of high-highs and low-lows, and crypto is no different.
The most important thing is to do your research and keep a close eye on the market. Due to crypto being so volatile, things can change rapidly, and it pays to have your finger on the pulse.
Bear markets can be difficult times for investors, there is no denying it, and the best piece of advice is to play the long game. But, as we have already said, there is no set period for a bear market, so patience is key, and HODL.
Options such as buying put, and short selling have always proven valuable trading options during bearish markets, so they are worth familiarising yourself with.
Likewise, during market corrections, the goal is to stay patient and play the long game. Corrections are the market self-moderating to ensure that it doesn’t collapse or oversaturate.
Market corrections are a necessary evil and cause short-term hassle for investors whilst protecting the market in the long term.
Investing in anything from traditional stocks to crypto is never a linear process; you will always see dips and peaks; the key is knowing how to navigate any market change to ensure that your assets are looked after.
We can’t say for sure when this current bearish period will end; all we know is that things will begin to balance out at some point, and the market will start to climb again.
The important thing is to stay calm and ride this period out without making any snap decisions. Likewise, we would say the same if we were experiencing a booming market period. The goal is to think long-term and not jump on bandwagons without doing your due diligence.
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La inversión en criptoactivos no está regulada, puede no ser adecuada para inversores minoristas y se puede perder la totalidad del monto invertido.