Bitcoin is the first top largest Cryptocurrency, capped at 21 Million coins. It has a reputation for being a profoundly volatile asset, meaning that its price tends to fluctuate dramatically over a relatively short period compared to other assets. Although Bitcoin is known for its store of value and treated as a haven, many established financial investors such as Warren Buffett and Carl Icahn perceive Bitcoin as a high-risk investment.
According to Woodbull Charts, Bitcoin’s current volatility shows 55.0% which is significantly more than the other mentioned assets such as the emerging currencies, oil, gold, US stocks, US real estates, and USDEUR.
High volatility can also be beneficial during bull markets; furthermore, it implies that Bitcoin prices can Crash and Correct frequently. Both these terms – Crash and Correction are often used interchangeably, but they serve different purposes. In some cases, Crashes can foretell the bear market and a prolonged period of cascading prices. In contrast, Corrections can oftentimes be a sign of a strong uptrend rebounding to a support level before retesting a recent high. Therefore, understanding the difference between the two is crucial.
In this blog, we are going to discuss Bitcoin Crash vs. Correction
Bitcoin Crash can be defined as a sudden price drop of more than 10% in a single day. It occurs during significant and abrupt swings in the Cryptocurrency market, resulting in investors panicking and fleeing in droves.
The underlying factors for Bitcoin Crash could be:
1. Technical variable effects
2. Macroeconomic events
3. Major company announcements
4. Changes in legislation, regulations, and policies, etc.
On April 10, 2013, the most remarkable drop in Bitcoin history occurred when the US Financial Crimes Enforcement Network (FinCEN) shut down Bitfloor – a Cryptocurrency Exchange and announced that Bitcoin Exchanges would have to register as “money transmitters.” According to Bitstamp data, Bitcoin prices fell 73.1% in 24 hours, from a high of $259.34 to a low of $70.
The other incident was following the World Health Organization's declaration of the coronavirus as a global pandemic, the infamous “Black Thursday” crash on March 12, 2020. It is also considered as one of the largest crashes when the prices plummeted 40%, from $7,969.90 to $4,776.59.
Bitcoin Correction can be defined as a gradual price drop of more than 10% manifesting over several days from its recent high. It's called Correction because it usually restores the price to its long-term established trend after an exceptional spike. They normally lead to recoveries, but they may also commence to longer periods of decline, also known as bear markets, in which prices can plummet by 20% or higher.
Bitcoin Correction indicates that the bullish traders are exhausted and need time to strengthen and recover. Exhaustion occurs when the majority of buyers have purchased the underlying asset, and no new buyers seem to support the uptrend. This is when the prices start to decline when sell orders continue to stack up while no one is willing to buy them on the other side of the order book.
The underlying factors for Bitcoin Correction could be:
1. Technical variables such as buyers functioning on effective resistance levels
2. Draining trading volume
3. Negative differences between bitcoin’s price and indicators such as the RSI – Relative Strength Index, etc.
In 2010, Bitcoin's price rose from $0.003 per coin to more than $19,000 in 2020, despite experiencing corrections of as much as 50% in a single day.
Prevention is better than cure
You can take the following measures to help secure yourself during Bitcoin Crash or Correction:
1. Learn and study the Bitcoin market and its related previous patterns.
2. Always have a strategy and plan ahead.
3. Know your risk tolerance and have an exit strategy.
4. Diversify your portfolio.
5. Don’t overwhelm yourself with FOMO, FUD, and panic, be resilient.
6. Always follow the golden rule, “Invest what you can afford to lose”.
To conclude, during a bitcoin price dip, you should be able to discern if it's a Crash or a Correction and whether the market is recovering normally or reacting to a surprise announcement. Understanding the difference between Bitcoin Crash and Correction can help you identify the Bitcoin market better and help you respond to various fundamental and technical aspects.
Disclaimer: The author’s views and opinions are for informational purposes only and do not constitute financial, investment, or other advice.