Crypto Crash vs Correction – Key Differences
Of CNBCTV18.com IST (published)
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A crypto crash can be defined as a drop of 10 percent or more in the price of a cryptocurrency within 24 hours. A crypto correction is defined as a drop of 10 percent or more in the price of a cryptocurrency, spread over a week or 10 days.
In the crypto industry, the terms “crash” and “correction” are used quite often, sometimes even interchangeably. It may surprise you, but both of these terms actually mean very different things. So stay tuned as we explain crypto crashes and corrections and how they differ from each other.
What is a crypto crash?
A crypto crash can be defined as a drop of 10 percent or more in the price of a cryptocurrency within 24 hours. This is usually the result of some recent news or development that has turned market sentiment on its head. The prominent examples of Bitcoin crashes were not limited to 10 percent but ended up halving the coin’s value at the time.
BitFloor Crash
On April 10, 2013, when the US Financial Crimes Enforcement Network (FinCEN) shut down a prominent crypto exchange called Bitfloor, bitcoin recorded its biggest crash of over 70 percent. The price of bitcoin fell from $260 to around $70. While bitcoin took less than six months to bounce back with a 900 percent increase, the sudden drop wiped out significant market capital.
Black Thursday
The other notable crash is known as “Black Thursday” in the cryptosphere. On March 12, 2020, the World Health Organization deemed COVID-19 a global pandemic. Bitcoin fell 40 percent after the announcement, plunging from $7,969 to $4,776.
What is a crypto correction?
A crypto correction is defined as a drop of 10 percent or more in the price of a cryptocurrency, spread over a week or 10 days. Corrections usually occur when there are no more bullish investors supporting an uptrend and prices begin to fall as sell orders continue to pile up. It is called a correction because prices fall back to an established trend after touching abnormal highs.
Differences between a crash and a correction
The most obvious difference between these price drops is the duration. Crashes happen quickly, while fixes take time. The next difference is the reason. Crashes are generally caused by large events that swing prices quickly and sharply. On the other hand, corrections are usually countered by technical factors such as strong resistance levels, reduced trading volume and so on.
Another important difference is the market sentiment. Corrections are cyclical and occur over days or weeks. As such, the market sentiment is more or less business as usual. However, a crash generally evokes fear and uncertainty and can lead to panic selling.
Finally, the aftermath of a crash and correction are also different. Crashes are often followed by a bear market and an extended period of falling prices. Conversely, corrections can lead to a healthy uptrend where prices retest a previous high.
Conclusion
Both crashes and corrections cannot be predicted. But knowing the difference between the two can help you make better investment/trading decisions. For both downtrends, it is also important to maintain a long-term strategy. This will help you ride out the lows and take advantage of the gradual increase in prices over time.
