Market correction vs. bear market: Key differences explained
What is a market correction in crypto?
A market correction is a short-term price pullback after the price has risen too quickly.
A market correction is a sharp but short-lived price decline in response to an overbought or overvalued market. In other words, a "pullback" from the recent highs allows the market to digest the gains and reset for another higher leg.
Generally, when the market drops 10% or more after coming from a recent high, it's considered a market correction. However, the 10% figure isn't a hard-and-fast rule. Some corrections are a 3% drop; others can drop as much as 20%. Market corrections of 5% to 10% are more common in cryptocurrency.
Corrections almost always occur when the economy is expanding, as investors become overconfident and push asset prices too high, which sets the stage for a "reversion to the mean" as corrections bring prices back to more realistic levels.
How often do market corrections happen?
Stock market corrections usually happen every two years, but since the crypto market is more volatile, price corrections tend to occur more frequently.
There is no definite timetable for crypto market corrections. As such, price corrections can occur in days, weeks or months. Occasionally, cryptocurrency market corrections can happen in a matter of hours.
Cryptocurrency prices are driven by several factors — all of which contribute to its overall market volatility. Hence, it can be challenging to pinpoint the exact time frame of a market correction.
What causes market corrections in cryptocurrency?
Several reasons can trigger a market correction in cryptocurrencies, such as overenthusiastic investors, regulatory uncertainty or marketwide sell-offs.
Some of the most common triggers include:
- Excessive speculation and investor exuberance: When investors get too excited about a particular asset, they tend to push prices too high, too fast, which can create an unsustainable bubble that eventually pops, leading to a market correction.
- FOMO (fear of missing out): When investors see prices rising quickly, they may jump into the market without proper research, thereby creating a self-fulfilling prophecy where prices continue to increase simply because more people are buying.
- Exchanges getting hacked: If a major exchange gets hacked and loses a significant amount of investors' money, it can trigger a marketwide sell-off and correction.
- Regulatory uncertainty: Any time there is regulatory uncertainty surrounding cryptocurrency, it can lead to a sell-off and corrections. For example, prices fell sharply when China announced it was cracking down on cryptocurrency in 2017.
What is a pullback in crypto?
Slightly different from corrections, pullbacks are temporary pauses or reverses in the overall value trend of an asset.
In crypto, pullbacks are relatively common and can happen several times during an uptrend or downtrend. Pullbacks are generally considered a healthy part of the market cycle as they allow the market to digest gains (or losses) and reset before moving higher (or lower).
Cryptocurrency pullbacks mean the temporary reversal will only stop, increase or decrease in value for a brief period, after which the asset's value will return to its original behavior.
What is a bear market in crypto?
A bear market is a prolonged period of falling prices, usually accompanied by widespread pessimism.
In other words, it's much like a market correction, but one that lasts for an extended period. For a market to be considered a bear market, prices must fall by 20% or more from recent highs. Just like market corrections, this figure is not set in stone and can vary, depending on market conditions.
As opposed to market corrections that happen during times of economic growth, bear markets usually occur when there is an economic recession or a stock market crash. A bear market in crypto can be caused by any of the same factors that trigger a market correction. However, they can also be caused by other factors, such as political turmoil or a natural disaster.
How long can a bear market last?
The duration of a bear market can vary greatly. Some bear markets last only a few months, while others can go on for years.
There have been 14 bear markets in the US from 1947 to 2022. Generally, the average length of a bear market can range from one month to 1.7 years, according to Investopedia.
Globally, bear markets tend to last for an average of ten months, give or take. However, there have been a few instances where bear markets have lasted much longer. For example, the "Crypto Winter" crash of 2013 to 2015 lasted 415 days or a little over a year.
How to build in a crypto bear market?
Can you make profits in a bear market? The answer is yes. Just as there are strategies for investing in a bull market (a period of rising prices), there are strategies for investing in a bear market too.
Some common strategies include:
- Short-selling: This is when investors sell an asset they do not own and hope to buy it back at a lower price so they can profit from the difference. Short-selling can be risky, though, as there is no guarantee that the price of the asset will fall as anticipated.
- Buying put options: This type of insurance allows investors to sell an asset at a specific price within a certain timeframe. If the price of the asset falls below the strike price, the investor can profit from the difference.
- Buying assets at a discount: Investing, in general, is a long-term game. And while there will be ups and downs along the way, bear markets provide an opportunity to buy assets at a discount.
- Doing your research: When prices are falling, it's more important than ever to do your due diligence and research an asset thoroughly before investing. With prices going down, there will be plenty of opportunities to buy assets at a discount. But, as always, it's important to remember that not all assets are created equal. Some are far riskier than others.
- Diversifying your portfolio: One of the best ways to weather a bear market is by diversifying your portfolio across different asset classes. This way, if one asset class is taking a hit, it will not severely impact your portfolio as a whole.
How to navigate corrections and bear markets?
Bear markets and market corrections are a normal part of the investing process, and there's no need to panic when they happen. Once you grasp the differences between both, it'll be easier to navigate them when they come up.
In general, the best way to navigate a bear market is by having a long-term perspective and staying disciplined with your investment strategy. And if you're feeling extra cautious, there are strategies like short-selling and buying put options that can help you profit from a falling market.
During economic expansion, mostly all price declines will be temporary pullbacks or corrections. The trick is to stay invested in cryptocurrencies during such corrections. Since primary trends are likely to be bullish when the economy is expanding, prices will tend to follow by eventually climbing to new highs. As with stocks, cryptocurrency prices rarely move up or down in a continuous straight line. Rallies are likely to be met by consolidation periods, wherein prices move sluggishly in either direction or through market corrections.
Out of the two, bear markets have a higher risk of destroying your investment portfolio, so it’s essential to learn how to spot a bear market before it happens. The first step is always determining where the economy is at — this way, you'll know how to react when prices start to fall.
If you're unsure whether we're in a bear market, the best thing you can do is stay diversified and continue following your investment strategy. By staying diversified, you'll be less likely to lose everything even if the market crashes. And by following your investment strategy, you'll know when to buy and sell regardless of market conditions.
Market correction vs. bear market
To summarize, here are some of the key differences between the two:
While corrections and bear markets can be daunting, remember they're normal occurrences within a healthy economy. Learning to differentiate between the two will allow you to navigate them better.
In terms of recovery time, markets tend to recover from corrections faster—typically within a couple of months. Bear markets, however, take a heavier toll on markets due to their longer duration and the greater magnitude of the price decline. As such, recovery from a recent bear market can take several months to a couple of years.