June 14, 2021

Correction or market crash: how to tell them apart?

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 when it is worth quickly selling off assets so as not to lose all the funds.

Losing money is always difficult, especially when it is earned by sleepless nights at the monitor. And the amount of losses is not important: the loss of $ 200 can also lead to a nervous breakdown.

What is a market correction?

A market correction is a wave movement against the main trading trend. It can occur both on an upward and downward trend.

Thus, the price is leveled to a fairvalues ​​if the asset is “overheated” or undervalued. In this case, the natural scales between demand and supply are included, 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:

  1. Psychological. Even minimal drawdowns within 1-2% cancause anxiety among those who bought on the highs. They expected the coin to grow at the same rate as before it was purchased. If there is a risk of losing, beginners quickly sell off assets to close the deal at zero. This leads to a further fall, which grows like a snowball. But at this point, 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 the stock. Participants in traditional markets have strong nerves and a lot of experience. They know money loves silence. The crypto community is mostly composed of young and hot 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 of a custom-made nature and is paid for by far-sighted “whales”.
  3. Change of risky assets to more predictable ones (or vice versa). This is the flow of investments within the crypto market.In this case, prices for some digital coins rise, while others fall. In order not to panic, you need to monitor the situation in the courses in a comprehensive manner. A change in the price of a separate token will not give a complete picture of what is happening. You need to monitor the bitcoin dominance index. If it keeps within 56-60%, then this is an indicator of the internal stability of the market. If it falls below 54%, it means that the whales are looking at altcoins and are looking for new investment objects.
  4. Changing growth cycles. The moment when big investors fixprofit can always be determined by the fall in price. In this case, you need to follow the course of the top three leaders in the race. If he is experiencing a correction in the range of 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 optimistic and often overlook impending collapse. But the higher the expectations of buyers, 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:

  • 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 global economy has occurredin 1929. But before that, the market grew exponentially: over the year, the stock market grew by almost 350%. Moreover, the share price was almost tripled. People were sure that after the end of the First World War, the economic growth would be very fast, so they bought up shares and took out loans without thinking about the consequences.

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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