Correction or market crash: how to tell them apart?

In this article we will try to understand what a market correction is, how it differs from a collapse, and whenIt is worth selling assets quickly so as not to lose all your funds.

Losing money – It’s always difficult, especially when they were earned through sleepless nights in front of the monitor. And the amount of losses is not important: even losing $200 can lead to a nervous breakdown.

What is a market correction?

Market correction – this is a wave movement against the main trading trend. It can occur on both upward and downward dynamics.

Thus the price is adjusted to a fair pricevalues ​​if the asset is “overheated” or undervalued. In this case, natural scales between supply and demand are activated, which bring the price to a stable state for a limited period of time.

Cryptocurrency markets, like traditional stock markets, are labile and subject to changes in asset prices for several reasons:

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1. Psychological.Even minimal drawdowns within 1-2% cancause alarm among those who purchased at high prices. They expected the coin to grow at the same rate as before it was purchased. If there is a risk of making a loss, newcomers quickly sell off assets in order to close the deal at zero. This leads to a further decline, which grows like a snowball. But at this moment the bulls come into play, leveling the situation.
2. Negative (or overly positive) news background.This marker is relevant for the cryptocurrency marketmore than for stock. Participants in traditional markets have strong nerves and extensive experience. They know that money loves silence. The crypto community mostly consists of young and ardent traders who are happy to exchange experiences and give each other advice, referring to analysts of news resources. At the same time, they do not take into account that the lion’s share of articles is custom-made and paid for by far-sighted “whales.”
3. Change of risky assets to more predictable ones (or vice versa).This is the flow of investment within the crypto market.In this case, prices for some digital coins rise, while for others &#8211; fall. In order not to succumb to panic, you need to monitor the situation at rates comprehensively. Changing the price of an individual token will not give a complete picture of what is happening. You need to keep an eye on the Bitcoin dominance index. If it stays within 56-60%, then this is an indicator of the internal stability of the market. If it drops below 54%, it means the whales have set their sights on altcoins and are looking for new investment objects.
4. Changing growth cycles.The moment when large investors fixprofit can always be determined by the fall in price. In this case, you need to monitor the course of the first three leaders of the race. If it experiences a correction within 12-15%, then we have a second phase of growth, and it will be followed by a movement towards a new psychological level.

These trends apply to both a single coin and the market as a whole.

But if a drop occurs in all top 30 cryptocurrencies, and the total capitalization decreases by more than 25%, then this is a signal that a massive collapse is possible.

Market crash, how it happens

People are inherently optimists and are often blind to impending collapse. But the higher the buyers' expectations &#8211; the more dangerous the situation becomes.

The reasons for a market crash are not always obvious, but they are always preceded by events that you need to know:

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• overheating of the market;
• weakness of leading cryptocurrencies;
• price / earnings ratio (reflects the expectations of investors);
• general negative trend in the world economy;
• reducing the price of futures for the top five cryptocurrencies to a level below the base (backwardation);
• high volatility that cannot be explained by a correction.

If out of 6 items you observe at least 4, this isalready cause for concern. In order to have time to respond in time to a possible market crash, it is necessary to assess the general economic situation of cryptocurrencies and the mood of institutional investors and whales.

The most powerful collapse in the world economy has occurredin 1929. But before that, the market grew exponentially: the stock market rose almost 350% in a year. Moreover, the value of the shares was overvalued almost three times. People were confident that after the end of the First World War, economic growth would be very rapid, so they bought shares and took out loans, without thinking about the consequences.&nbsp;

But the economy doesn't like euphoria. The global collapse that followed Black Monday led to the Great Depression, from which the world struggled for several years.

The cryptocurrency market has not experienced this yet. And, judging by what is happening, the collapse does not threaten him yet. The rate of cryptocurrencies today signals a correction, and this is a normal process.

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