Although they are sometimes used interchangeably, the terms “market correction” and “bear market” hold different connotations. Talking of market correction vs. bear market, a market is generally regarded to have experienced a correction when it declines by at least 10% from its most recent high, whereas a bear market is defined as a decline of at least 20% over at least two months.
You can assess market patterns and forecast future movements more effectively if you know the difference between a market correction and a bear market. This will allow you to make smarter investment selections based on your risk tolerance and unique investing criteria.
Let’s explore the key distinctions between a market correction and a bear market, including their frequency and duration.
Market Correction vs. Bear Market
The percentage decrease in the price of a cryptocurrency/cryptocurrencies is one important distinction between a market correction and a bear market. Additionally, the time frames and the frequency of occurrence of these two patterns vary. While a bear market is used to describe a wide market index consisting of a hypothetical portfolio of cryptocurrencies, a correction can refer to a decrease in either a market index or a specific asset.
Let’s look at some pointers better to understand the dynamics of market correction vs. bear market.
Time
Bear markets and market corrections don’t have the same time durations, but their magnitude of drops tends to give them specific time frames. As you might anticipate, market corrections, which only involve 10% drops, often take less time than bear markets, which can stretch for years. Each market reversal and bear market may last for a long time. Bear market history of the crypto market is testimony to this fact.
Frequency
Shorter market corrections are more common than bear markets. Several market corrections may occur during a bull market before a more significant collapse into a longer-lasting bear market with sharper declines.
Delayed Recovery
A bear market often takes longer than a market correction, during which the market takes more time to rebound to its prior high due to its more severe falls spread over a longer duration.
What is a Market Correction in the Crypto Market?
When a market is overbought or overvalued, a market correction is characterized by a sudden but brief decrease in price.
Generally, a market correction is defined as a decline of 10% or more in the market following a recent peak. As investors get overconfident and drive asset values excessively high, corrections nearly always happen while the economy is expanding. This creates the conditions for a “reversion to the mean” as corrections bring prices back to more reasonable levels.
What Causes Market Corrections in Cryptocurrency?
Among the most frequent triggers are:
Excessive speculating and investor euphoria: When investors become overly enthusiastic about a particular asset, they tend to drive prices up too quickly, leading to an unsustainable bubble that bursts and triggers a market correction.
Fear of missing out (FOMO): When investors notice prices increasing quickly, they might purchase without conducting adequate research, which could lead to a self-fulfilling prophecy where prices rise merely because more people are buying.
Hacking of exchanges: If a large exchange is compromised and investors lose a sizable sum of money, it may cause a sell-off and correction in the entire market.
What is a Bear Market in a Crypto Market?
When a market price drops significantly over an extended period, a bear market begins to form. It is a time when the value of shares drops by 20% or more from recent highs as a result of pervasive pessimism and negative market sentiment. Bear markets frequently follow significant drops in a bigger market or selective market index. Cryptocurrencies may also be categorized as being in a bear market if they see a 20% loss over an extended period, often two months or longer.
In contrast to market corrections, which may occur during an economic expansion, bear markets frequently form during economic contraction or a stock market crash. Cryptocurrency bear markets can be caused by any factors that cause a market correction. However, other factors may also contribute to them. 2022 is facing one of such bear markets in the bear market history of crypto.
Another bear market example can be the well-known cryptocurrency crash that occurred in December 2017, during which investors witnessed Bitcoin drop from $20,000 to $3,200 in a matter of days.
How Long Can a Bear Market Last?
Bear markets can endure for years or may continue for simply a few months in some cases. Bear markets typically last between one month and 1.7 years on average, considering the bear market history.
How to Navigate: Market Corrections vs.. Bear Market?
The best strategies for surviving a bear market involve keeping a long-term view and sticking to your investment strategy. If you’re feeling extremely cautious, you could also be able to profit from a sinking market by using strategies like shorting stocks and buying put options.
Having a long-term perspective and sticking to your investing plan are generally the best ways to navigate a bear market. Some tactics can help you profit from a declining market, such as shorting stocks and purchasing put options if you feel very cautious.
Most price losses will occur as brief pullbacks or corrections during economic expansion. The secret is to keep buying cryptocurrency amid such corrections.
Prices often follow primary trends, which are likely to be optimistic when the economy is growing, eventually rising to new highs. Similar to equities, cryptocurrency values don’t often rise or fall in a straight line.
Out of the two, bear markets are more likely to wipe out your investment portfolio; therefore, it’s critical to develop the ability to recognize one before it occurs. Always start by assessing the state of the economy so you’ll know how to respond when prices start to drop, and try to learn from bear market examples that have happened in bear market history.
Bear markets and corrections may be unsettling, but remember that they are typical occurrences in a healthy economy. If you can learn to differentiate between the two, you’ll be able to navigate them more successfully. Looking for a reliable crypto exchange to get your trading journey started, head over to Giottus — a one-stop shop for all your crypto trading woes!
