Market Corrections in Crypto: A Healthy Pullback?

Correction is a decline in the price of an asset by at least 10% to correct for overvaluation.

What is correction?

There is no strict definition of a correction, but it is commonly used to describe a rapid decline in the price of an asset by at least 10% from its recent peak. It is called a correction because it usually returns the price after an abnormal spike to its long-term established trend.

A correction is usually followed by a recovery, but longer periods of decline, called bear markets, are also possible, when prices can fall by 20% or more.

According to the Charles Schwab Financial Company, for example, there were 24 corrections in the S&P 500 stock market index between November 1974 and February 2020, and only five of them led to bear markets.

Because of the high volatility characteristic of the cryptocurrency market, corrections of 5-10% occur much more frequently than in the stock and other traditional markets.

However, they tend to be counterbalanced by equally frequent recoveries, and the overall trend of most major coins has been bullish since the market’s inception in 2009.

For example, the price of bitcoin (BTC) rose from $0.003 per coin in 2010 to more than $19,000 in 2020, even though the correction sometimes reached 50% within a single day.