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Bear Market Vs. Market Correction – What Are the Key Differences?

Published: Wednesday, 10th August, 2022 - 22:12

Overview

Both market correction and bear market usually refer to a time frame that highlights some sort of downfall in the stock market. In a very general meaning, a market correction is experienced when the market has a minimum downfall of 10% from its previously recorded high valuation and a bearish market is experienced if the market drops by a minimum of 20%, also usually having a longer time span.

Learning about both market situations can not only provide you with a better understanding of the market, but also assist you in making better decisions about investments, which is based upon your own level of analyzing and handling risks, plus your methods of investing.

Moving forward, we must first understand the basics of both markets and then discuss about the key differences of both, which depend upon multiple different factors.

Understanding market correction in crypto

A market correction is basically a price pullback if the prices of assets in a market have managed to surge in a short amount of time. Market corrections can be quite harsh in the financial ecosystem; however, they do not last for very long. It is basically an event that is triggered if the market is either experiencing too much buying or is overvalued. That pullback enables the market to mitigate the overbought situation and basically perform a restart to prepare for a larger leg.

If a market experiences a percentage downfall of a minimum of 10% or more, then it is recognized as a market correction, however this percentage minimum is not some organized rule. Market corrections can also happen on percentage drops of less than 10%, while some market corrections can reach as high as 20%, but in history of the cryptocurrency space, market corrections have usually occurred with a percentage of 10% or less, hence the perception.

Sources of market correction in crypto

There are many sources that can contribute towards triggering a market correction in the cryptocurrency market. Here are some of the ordinary reasons to why a crypto market correction can take place.

Firstly, there is investor hype. If an investor becomes extremely biased and favorable towards a particular currency or asset, they contribute towards the quick increase in its price valuation in a short amount of time, developing an unstable bubble, which when pops, results in a market correction.

Secondly, there is the psychological concept of fear of missing out (FOMO), in which when investors experience a market change, instead of properly studying the market, they hop onto the bandwagon based on their own perception, leading to overbuying and increase in price valuations.

The third reason includes cryptocurrency exchanges being subject to hacking events. In the case of a popular cryptocurrency exchange getting hacked, it can lead to a massive level of loss, not only for the exchange itself, but also the precious investments made by thousands of traders. The result is a huge sell-off and a market correction.

And lastly, issues regarding uncertain regulatory measures can become a problem. Problems with regulations means that massive selloffs will occur, triggering a correction. We can take the example of when the country of China introduced a crypto ban back in 2017, overall market prices saw a massive change, leading to a significant correction.

Frequency of market correction

Market corrections in the stock exchange mostly occur after about two years of time, but the case of the cryptocurrency market is very different. Due to the nature of the cryptocurrency market being more volatile compared to the traditional market, market corrections in the cryptocurrency market happen quite a lot.

There is no clearly defined schedule for market corrections in the cryptocurrency market, so a correction may happen at any time, to a point where the corrections can often occur within a matter of hours.

The price valuations of cryptocurrencies are a subject to change based on different factors, which also contribute towards the level of market volatility, so it is quite difficult to predict an upcoming correction. Some market gurus have quite a good reputation of predicting corrections, however even that is not enough to fully determine a correction coming. The concept is quite like predicting weather, you cannot fully tell how the state of the weather might change.

Market pullbacks in crypto

This concept is a bit contrasting in comparison with market corrections. Pullbacks are basically makeshift halts or reversals of the price valuation of a certain asset. Pullbacks happen quite a lot in the cryptocurrency market, having an occurrence frequency of many times in the event of a rise or downfall.

These pullbacks are commonly considered to be beneficial for the market, because it helps the market to mitigate rapid changes and trigger a reset before the market can adjust again to a much more stable state. Pullbacks in cryptocurrencies mean that the reversal is only going to occur for a limited amount of time, after which the price valuation trend of the asset will return to normal.

Bear market concept in crypto

Now that we have a much better understanding of market corrections, it is now time to understand bear markets.

A bearish market is considered to a long-term price decline of the assets in a market that is also followed by a sort of panic or a tendency to believe that the market is in its worst timeframe. In much simpler terms, a bearish market is very similar to a market correction, however the timeframe is much lengthier in comparison to market corrections. Not only that, the decline of a price valuation the market should be a minimum of 20% or more from the recently recorded high, to be considered bearish. But as mentioned before, these percentage limits do not follow any rules.

While market corrections may occur multiple times, having a much higher frequency, a bearish market state only happens if there is some sort of economic recession, meaning that there is a downfall in the business cycle, or the stock market has experienced a major crash. The causes of a bearish market are in line with the causes of a market correction, however there are some additional causes like political turbulence or the case of a natural disaster occurring suddenly.

Duration of bear markets

As mentioned, bearish markets are present for much longer than market corrections, but the timeframe of bearish markets can extend differently. Sometimes bearish markets last a few months, but other times bearish markets can stay for multiple years, making them much more serious.

Looking at the history of the cryptocurrency space, bearish markets have usually persisted for about an average of around ten months, but in some cases, the bearish market has lasted for more than a year. A major crypto bearish market occurred back in 2013, commonly known as the “Crypto Winter” which managed to sustain itself for nearly 415 days of time. According to the balance.com, only about 26 major bear markets have shown up since the year of 1929.

The most recent bear markets that occurred include, the one back in March of 2020, during the COVID-19 pandemic and other one which lasted almost two years from 2007-2009, which was the result the chaos that generated in the housing market.

Development of a crypto bear market

The thing with bear markets is that they might seem to be a bit threatening to some, however the potential of making money out of a bear market is possible, so some players of the market are looking towards bearish markets to make a quick dime. Just like bearish market, the bullish market also brings an opportunity for players in the market to invest and make money on.

Different players in the market develop earning strategies for both bearish and bullish markets. Below mentioned are some everyday strategies that players use to earn from a bear market.

Firstly, there is the method of short selling. In this method, a trader sells all the unacknowledged assets and then manages to buy the same amount at a much cheaper rate to make profits out of it. This method can be effective however it involves risks, as there is no telling if the price valuation of the asset will either fall or rise. So, for example, if the trader sells his assets and the prices increase, then it leads to loss.

Secondly, there is buying put options. This is basically a kind of assurance method which enables a trader to sell his assets at a certain price point, in a limited amount of time. So, if the price manages to fall below that certain sale price, then the trader can benefit from it, gaining profits in return. However, this still carries that same risk of the price fluctuation mentioned with an example above.

Another method involves performing extensive research on an asset. If the price valuation of an asset is experiencing a downfall, instead of just investing it, it is crucial to do comprehensive research on the asset, to learn about its true worth in the market. The downfall of price valuations of assets can be quite attractive; however, it is important to understand that not all assets have the same value and may carry certain risks that can hinder their potential in the market.

And lastly, there is advancing your portfolio. This is one of the best and most favorable ways of making something out of investments, by investing into sets of various classes of assets. This way, if one of the markets is experiencing a downfall, it will have minimal effect on your complete portfolio, that will include other asset classes experiencing better price changes.

Key differences between market correction and bear market

Since we have understood the basics of both markets, it is now time to recall the key differences of both markets. Below mentioned are four factors which are to be considered when differentiating between the two markets.

  1. Percentage decline

In this term, market corrections usually occur when there is a downfall in the broad market index of approximately 10% or less, while bearish markets require an approximated minimum of about 20% downfall in the broad market index, to be recognized.

  1. Time frame

As for time frame, market corrections do not last for much long and are temporary reversals to stabilize the market. Bearish markets can persist for a long time, but their persistence is ranged quite vastly, having a time range that spans from a couple of months, to even several years if the situation is intense.

  1. Frequency

In terms of frequency, market corrections happen much more frequently compared to bear markets, often occurring in a matter of hours of the market situation. Bear markers on the other hand are usually the result of an economic recession, or a massive crash in the stock market.

  1. Recovery length

Due to its long-lasting nature, bearish market can bring a heavy toll, hence it takes quite a while before the market can recover back, usually having a recovery time of a minimum of ten months to a year. For corrections, the market recovers fast, since they are short-termed, but there is still no fixed amount of time for recovery, so the recovery can happen either in a couple of hours or can even take several months.

Responding to a market decline

Both bear markets and corrections are sort often seen as a regular part of the cryptocurrency market, so it best to remain calm and collective when they occur. Making the wrong decisions out of a panic state can lead to either minimal or even severe level of loss, so it is important to be extra vigilant during these circumstances.

Gaining knowledge regarding to the types of markets can be quite beneficial and provides an easier and effective way to handle such circumstances. In simple terms, the most effective way of going through a bear market is to think long-term and staying true to a specific investment technique, which is there to guide you. If for example, you feel more worried than usual, strategies like short-selling and several others mentioned previously can provide you an opportunity to use that bear market and make an earning out of it.

In the case of an economic revolutions, majority of the decline in asset price valuations are seen to be temporary pullbacks or short-term corrections. The secret to being stable during these correctional events is to maintain faith in cryptocurrencies. Predominant trends often tend to be bullish, so when the economy experiences a revolution, it will result in prices to record new highs. Like stocks, cryptocurrency price valuations do not fluctuate much when going in a singular direction. Price rallies are intercepted by consolidation time frames, so prices move quite slowly during market corrections.

Unlike corrections, bear markets can be more dangerous towards investments that are out of the ordinary, so it is very important to understand, predict and highlight a bear market, before it can wreak havoc on an unordinary investment. As an initial step, it is vital to analyze the state of the economy for you to act if the prices experience a decline.

As mentioned before, if you are experiencing some sort of confusion, it is best to maintain an assorted portfolio and keep faith in the investment strategy. Having an assorted portfolio means that a certain market falls, the others asset classes will still be present to mitigate the situation, leading to better investment stability. Staying true to an investment strategy will boost your knowledge on when to invest or sell, irrespective of the type of market.

Some long-term investors, mostly being young and inexperienced are usually advised to keep a hold of their investment and patiently wait for the market to return to its normal state. Investors that include mostly retired players, who are looking to maintain their money, might tend to follow selling strategies in the case of a market downfall, mostly developing a stock price on which they are keen to sell.

And other types of investors follow a different strategy where they patiently wait for the market to fall in preparation of purchasing stocks at a much cheaper rate. This enables them to achieve much more significant amount of profit when those stocks recover.

If there is still some confusion or annoyance that bothers you in performing an investment, it is advised to reach out to a professional financial consultant, who will utilize their knowledge and experience to help you make a better decision investment in the case of a market downfall.

Concluding Notes:

Market corrections and bear markets can cause influence over one’s ability to make an investment decision, but the thing to remember is that these events are part of a growing economy, so having proper knowledge and following effective strategies can help you pass through them, either by sustaining, or making a profit out of it. While market corrections tend to be short, bear markets can last a very long time and can cause significant toll.

This post first appeared on: CryptoCy News

Author: Jay Howell
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