How a Bitcoin crash is different from a correction

Bitcoin has grown to be one of the world’s best-performing assets in the last couple of years. No matter the level an asset reaches, it still has its ups and downs. The majority of cryptocurrency has witnessed an increase in value by 1000000% but that has not stopped some of these platforms from having their fair share of crashes and corrections in the market.

When the price of this digital currency declines, it is not uncommon for people to use words like “crash” and “correction” interchangeably. More often than not, investors mistake a crash for a correction despite the two terms carrying different meanings altogether.

Latest happenings with Bitcoin

The entire cryptocurrencies and most especially Bitcoin witnessed a phenomenal amount of growth between 2020 and 2021. Within six months in between this time, the currencies have grown 600% and has doubled their values so many times.

However, the last couple of months have been a bleak period for many of this digital currency. Many of them have experienced a 30% drop in value when the China Banking Association issued a warning to its member banks of the risks associated with digital currencies. Although the decline narrowed below 10% on the same day, Bitcoin’s market value dropped nearly $70 billion within a day.

With the recent ban on mining in China, bitcoin that reached an all-time high of $65, 000 has noticed a serious loss of value and this has but a shift in the market. Since Bitcoin has fallen to nearly half of its all-time high value, most investors fear that we are in the middle of a Bitcoin crash similar to the Black Thursday Crash of March 2020. On the other hand, analysts from Crypto Engine suggest that the dip is merely a correction in the crypto market.

What is a crash?

A crash in traditional finance refers to a price drop of over 10% in a day. Crashes usually happen due to sudden and impactful moves in the cryptocurrency market that could cause panic among investors who exit the market en mass. While technical factors like demand play a vital role in Bitcoin’s price, other fundamental factors such as macroeconomic events, sudden implementation of regulatory changes or significant company announcements could cause a large crash in the market.

What is a correction?

any drop in the price of an asset is characterized as a correction when prices fall more than 10% from a recent peak over several days. Many investors tend to overvalue bitcoin. When this happens, the market tends to correct itself when all the bullish is over and traders need time to consolidate and recover.

Corrections are often initiated by minor events and technical factors such as buyers in the market-facing intense resistance levels, low trading volumes etc. During technical analysis, it can often be detected with indicators like RSI (Relative Strength Index) or Fear and Greed Index.

Should any of these factors be a cause for worry?

It is normal for its prices to fluctuate up and down rapidly. According to analysts, the current dip in price could be a healthy correction and could be a good time to invest in the crypto market. It is not the first time that Bitcoin is witnessing such a steep fall in prices. Though a 40% drop in its value looks dramatic, it is pretty typical in volatile markets, especially after a massive bull run of over 600% rise in value. Even though Bitcoin witnessed over an 80% price drop in a single day in the past, its value bounced back over ten times shortly.

Conclusion

Most investors tend to think short term when it comes to cryptocurrencies which is another cause for their volatility. The asset is just a decade old and is yet at the nascent stage of growth. Hence, there could be sharp highs and lows along the way. If you plan to hold Bitcoin for the long term, the chances are high that you could reap good returns in future.

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