Price corrections are natural occurrences in financial markets. Most of the time, they’re actually a good thing for traders, even though it may not always feel like it. Why? Because price corrections generate buying opportunities and the potential for higher profits.
The price of Bitcoin, for example, has seen many corrections over the years, and many analysts predict a further correction of as much as 40%.
So, losing sleep over the possibility of a correction makes no sense, as sooner or later it’s going to happen anyway. Beginners and novice traders often find a downward adjustment hard to digest. That’s because they can’t see it coming and tend to overreact.
Prices going down with no idea how long the nightmare will last is enough to make your head spin, especially when it happens overnight.
However, more experienced investors and traders know how to handle this type of situation. Usually, price corrections last for a few weeks, maybe months, and then the market recovers. So, you shouldn’t panic if you plan long-term investments.
What are price corrections?
A price correction happens when the price of an asset or security declines by 10% or more from its most recent peak. Corrections are part of the game, and Bitcoin HODLers know it better than anyone. BTC’s price crashed by 23% at the end of June only to gain back almost $2,000 in less than 24 hours.
Price corrections are a mechanism that enables the market to adjust overvalued assets. It also provides buying opportunities for investors who understand financial markets.
As a guideline, average price corrections involve prices falling by 13% and last about four months. Price corrections in bear markets last longer – up to 13 months – and register an average loss of 30%.
Price corrections in the crypto market
Cryptocurrency market crashes are harder to predict, as the ecosystem is still too young to provide reliable statistics. Cryptocurrency exchanges mostly deal with flash price corrections, as prices of most cryptocurrencies tend to drop very quickly, following Bitcoin.
Crashes usually last for a couple of weeks or a month. However, in such a dynamic ecosystem, it’s impossible to predict how long the next correction is going to be.
The people who are most at risk when a dramatic correction occurs are short-term traders. Day traders, above all, suffer the most from flash price changes, as they’re often leveraged on an exchange. Significant losses are less likely to happen to traders who can afford to wait for the price to recover.
Crypto markets are different from other financial markets because they’re incredibly volatile. This also means that a price correction could lead to you losing all your funds within a couple of hours. If that happens, it will be of little comfort that the price will go back up eventually in a couple of weeks or a month.
How to protect your crypto from price corrections
The worst part about price corrections is that no one can predict when they’ll start or how drastic the fall will be. Most analysts and investors try to make educated guesses based on past corrections.
It’s hard for cryptocurrencies, though. Most of them don’t have enough trading history to rely on. Bitcoin has been in the market for more than 10 years, and people rarely manage to predict its price movements.
However, it doesn’t mean you shouldn’t invest anymore. There are a few methods you can use to protect your funds from price corrections.
Learn as much as you can about the market before investing large amounts. If you’re trying to make money in a bear market, always look for clues that could signal a price correction. When the price goes “parabolic”, it may be a sign that a correction is coming.
An exit strategy
When prices start moving against you, an exit strategy could be a smart way to minimise damages. Set some rules about the value of your cryptocurrencies and stick to them. Do the maths and see how much you can afford to lose. Most of the time, price corrections are more than 10%.
Buying and trading a single cryptocurrency is risky, regardless of its reputation in the market. Most digital coins tend to follow Bitcoin, which gives you time to analyse your possibilities. However, flash corrections can happen, so if you bet all your funds on one coin, you risk losing everything overnight.
Price corrections impact crypto traders differently, depending on their skills and goals. Day traders are more at risk. They should pay extra attention to any clues that could indicate a price correction on the horizon.
Always keep in mind that no investment is without risk. At the same time, price corrections always happen, and after some time, things go back to normal. This is typically a good opportunity to invest.