Why Is the Cryptocurrency Market Down?
Benjamin Franklin famously said there are two inevitable things in life: tax and death. In the modern world, with the advent of cryptocurrencies, there’s one thing that’s more certain than others: volatility.
Cryptocurrency prices are known to fluctuate wildly. Sometimes the market is up, sometimes it’s down, even within a matter of minutes. You can go to bed and wake up to astonishing changes in prices. Ever since Satoshi Nakamoto created Bitcoin a little over a decade ago, volatility has been a common aspect of crypto markets.
Bitcoin has played a significant and leading role in the cryptocurrency community. Being the first to arrive on the scene, the Mother Coin has maintained its top position by market capitalization and is worth a healthy chunk of the whole crypto industry.
As a result of this sustained dominance, when Bitcoin appreciates or depreciates, it has a ripple effect on other cryptocurrencies. It is observed that altcoins shed or gain value, sometimes more than Bitcoin itself. Bitcoin’s dominance in the market makes it a frequent catalyst for volatility in the crypto industry.
To quote an example, when Bitcoin recently suffered a sharp drop in prices, the cryptocurrency market also went through a correction. After hitting an all-time high of $64,800 on April 14, 2021, Bitcoin shed more than 33% of its value by May 18. The market lost more than $300 billion (USD) in the process.
Before this, Bitcoin had been on a remarkable bull run. The cryptocurrency saw roughly 1500% gains from the $3,800 it was worth in March 2020 to its peak in April 2021. After such a strong trend, many started to question the possibility of a market correction
What Is a Market Correction?
A market correction occurs when an asset sheds a significant portion of its value in a short time. This behavior re-aligns and balances the forces of demand and supply in the market. We call this price change a correction because it returns the cryptocurrency price from an abnormal surge to its long-term established trend.
Corrections can happen to individual cryptocurrencies, like Bitcoin, ETH, or BNB; or to the cryptocurrency market as a whole. Corrections are usually associated with traditional stocks and shares, but it is applicable to cryptocurrencies too.
Conventionally, a market correction is a sustained fall of at least 10% in the price of a digital asset from its most recent peak. Although we can use trading indicators to make predictions as to when a correction may occur, no one really knows for sure what will trigger them. We also can’t predict when they will start, end, or how much value will be lost until it is all over. Nevertheless, recent market events may be blamed.
The recent crypto market correction can be attributed to the sharp decline in the price of bitcoin. After hitting a new all-time peak of $64,800 on April 14, Bitcoin quickly went through a correction three days later, losing about 12% of its value. As expected, a ripple effect occurred as traders and investors quickly sold their altcoins to avert losses.
The total market capitalization of cryptocurrencies worldwide fell by 13% (about $300 billion) during this period. This loss shrank the market from over $2.2 trillion to less than $1.9 trillion, according to CoinMarketCap.
It is not exactly certain what caused the correction, although several factors could have influenced the drop. One reason often quoted is the power outage in Bitcoin mining locations in China, which caused the network’s total hash to drop significantly. It could also be that the market is simply over excited and just needed a correction.
Many other factors could influence a correction like technical factors, market liquidity and circulation, headline news stories, shifts in regulations and policies, and more. Therefore it is tough to pinpoint just one at any given correction.
How Does a Market Correction Work?
Crypto market corrections are antonymous with bull runs, a period of sustained appreciation in the prices of cryptocurrencies.
When a digital asset goes through a prolonged appreciation in its price, it can become overvalued. Eventually, the demand for the asset weakens and the supply increases, causing a market correction.
At this point, many traders and investors will sell their holdings to take profits. Sometimes, the correction can be intensified by news and other external factors. The initial selloff often leads to other crypto stakeholders selling their holdings, causing the price to drop further. A repeat of this situation sustains the drop until we reach a price where demand is strong enough to withstand selloff pressure.
There can be several corrections during a bull run as demand and supply adjust to a cryptocurrency’s market valuation. Several corrections preceded Bitcoin’s run to its recent all-time high of almost $64,000 in April 2021. There were brief corrections when Bitcoin’s price hit all-time highs. The coin shed about eight percent of its value before the price continued its bull run. Ethereum also experienced a correction after hitting $1,926 in February 2021.
Corrections are usually followed by recoveries, with the market continuing on its bullish run after shedding some value. However, if sustained, market corrections can lead to more prolonged periods of decline called bear markets. When the market is bearish, cryptocurrency prices can drop by 50% or even more. Bitcoin’s all-time high of $20,000 in December 2017 led to several corrections, which eventually turned into a two-year bear market.
What Should You Do During a Market Correction?
A 10% drop in the value of one’s crypto portfolio is enough to cause some investors to worry. If you’re a short-term or day trader with leveraged assets, a correction could seem like they are fatal for your positions. If you’re not an expert on trading, instead of giving in to knee-jerk reactions, it is best to understand that corrections are going to occur, and make a calculated decision whether to hold or attempt to trade and profit.
It’s easy to make rash decisions based on emotion, but you should try to avoid this. Corrections occur in the crypto market, but they don’t always lead to bear markets. Rather than selling during a price drop, some long-term crypto users choose to ‘hodl’ onto their crypto assets instead.
Protecting your crypto portfolio against the effects of market corrections may be challenging, but it’s not impossible. Since you cannot pinpoint when a correction starts, ends, or turns into a bear market, having a plan just in case isn’t a bad idea. It doesn’t have to be elaborate, but it should prepare you for future market corrections. Here are some ways you can make the most of your crypto assets during the market correction:
First, you can choose to set stop-loss or stop-limit orders to deal with declining prices. These allow you to exit the market before your portfolio loses too much value. These market orders trigger when a cryptocurrency reaches a certain preset price level. We recommend monitoring them from time to time to ensure that they are in tune with the current market situation.
Second, if you're a long-term crypto holder, you can choose to put your crypto assets into investment products and financial management tools to earn passive incomes, such as Binance Earn. With Binance Earn, you can start saving, staking, or even becoming a liquidity provider in DeFi markets to earn passive income on bitcoin, stablecoins, altcoins, and even on fiat currencies.
Other possibilities are to convert your crypto holdings to a stablecoin to weather out a correction. When the correction is over, you can convert your assets back to the original cryptocurrency. Price alerts will give you a better chance to prepare this strategy and get it right. Do note that this is not without risks, so do your own research before making the decision.
All in all, market corrections are not to be feared. If you plan for their occurrence, you’ll be less likely to enter panic mode when corrections happen. By failing to prepare, you are preparing to fail.
Pros and Cons of Investing During a Market Correction
Investing during a market correction can be a hit or a miss. It could be a huge mistake and it can also be the best decision you’ll ever make; it all depends on what happens after the correction.
Bitcoin’s all-time high of December 2017 was followed by a correction which gradually turned into a bear market. Investing during that correction would have been a mistake. Those who did either waited for years before they could make a gain or ended up selling their coins at a loss. Waiting that long for the market to bounce back can wear on your emotions and mental health.
At the same time, corrections could provide great buying opportunities for investors. The famous ‘buy the dip’ quote in crypto circles stems from making the most of a market correction by buying coins at relatively low prices. If things go well, you could slowly build a crypto portfolio that could be worth more in the future.
Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.