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The difference between a market correction and a bearish market; What you need to know

تفاوت اصلاح بازار با بازار نزولی؛ آنچه باید بدانید

It is not an easy task to correctly analyze and check the movements in the price charts of digital currencies. Usually, investors and traders of the digital currency market cannot distinguish between different market events due to the complexity of this market and the similarity of changes in price charts. Of course, we should not forget that this issue does not apply to all market users, and definitely, more experienced users with more technical knowledge can correctly recognize market developments.

One of the factors that may confuse novice and inexperienced investors is the similarity between a bear market and a correction in the market. Many users panic when they see the price correction in the market and think that the bear market has started, and following this wrong diagnosis, they make even more incorrect decisions. The opposite of this situation is also seen among the users: inexperienced users who deny the beginning of the downward market period and accept the market downwards when they have lost an important part of their capital.

In this article, we are going to take a look at an article From the Coin Telegraph website, let’s examine the concept of bear market and market correction and how to recognize each of them and the difference between them; So stay with us until the end of the article.

What is market correction?

A market correction is a short-term pullback of the price after its rapid growth. A correction occurs with a sharp but short-lived decline in price in response to growth or overvaluation in the market. In other words, the pullback from the recent highs allows the market to digest the gains and prepare for another upswing.

Generally, a price correction has occurred when the market falls 10% or more after reaching its recent high. Of course, the 10% figure is not a rigid rule, and less or more than that can be considered as market correction. Sometimes, the reduction is 3%, and sometimes the price reduction may continue up to 20%. However, in general, in the digital currency market, we consider a 5-10% price drop as a correction.

The difference between a market correction and a bearish market;  What you need to know

The important thing about market correction is that it always happens when the underlying market economy is growing and expanding. The reason for this event is that investors increase the price of an asset too much with their overconfidence in a certain area. This trend provides the basis for the “return of the market to the balanced level”. In fact, reforms can bring prices back to more realistic levels.

When does a market correction occur?

Stock market reforms usually happen every two years; But since the digital currency market has more fluctuations, price corrections occur in less time intervals and more frequently. There is no fixed timetable for cryptocurrency market corrections, and price corrections may happen every few days or weeks or months. Sometimes even cryptocurrency market corrections can happen within hours. The price of digital currencies is determined by several factors, and all these factors are effective in creating general market fluctuations; Therefore, determining the exact time frame for market correction is a difficult and complicated issue.

What factor causes the correction of the digital currency market?

Several reasons can cause a correction in the digital currency market; including investor over-eagerness and uncertainty over the regulatory situation and wholesale and retail short selling across the market. Some of the factors affecting the market correction are:

  • Excessive speculation and excitement of investors: When investors get too excited about a particular asset, they drive up prices too quickly and too much. This behavior can create an unstable bubble in the market that will eventually lead to a market correction.
  • FOMO or fear of missing out: When investors see a rapid increase in prices, they may enter the market without proper study and research. As a result, their prediction of a price increase in the market, simply because more users have bought, is temporarily realized.
  • Hacking exchanges: If a major exchange is hacked and a large amount of investors’ money is lost, it can trigger a sell-off and correction in the market.
  • Legislation uncertainty: In the cryptocurrency market, regulatory uncertainty can lead to sell-offs and corrections at any time. For example, when China announced in 2017 that it was cracking down on digital currencies, prices plummeted.

Read more: What is FOMO in the market and how to avoid it?

pullback (Pullback) What is?

The concept of pullback is slightly different from modification. Pullbacks temporarily halt or reverse an asset’s price trend. In the cryptocurrency market, a pullback is a common event and can happen several times during an uptrend or downtrend. In general, pullbacks are considered a healthy part of the market cycle; Because they allow the market to digest gains or losses and reset before moving higher or lower.

A pullback in digital currencies means that changing the behavior of the asset price stops for a short period of time and the price increases or decreases, and then the value of the asset returns to its original behavior. In other words, if the price of the asset is bearish and starts to rise for any reason, the uptrend will stop for a short time and the price will decrease, and then it will return to its upward trend again.

bear market (Bear Market) What is?

A bear market is a prolonged period of falling prices, usually accompanied by widespread pessimism among users. In other words, it is initially very similar to a market correction; But a correction that lasts for a long time. For a market to be considered a bear market, prices must decline by 20% or more from their recent highs. Just like the point we said in the market corrections section, this figure is not fixed in the bear market and can vary depending on the market conditions.

Unlike market corrections that occur during times of economic growth, bear markets usually occur when an economic downturn has set in the market. The creation of a bear market in digital currencies can be caused by the same factors as the factors that create a correction in the market. However, there are other factors such as political turmoil or a natural disaster that can cause a bear market.

How long does a bear market last?

How long a bear market lasts can vary greatly. Some bear markets last only a few months; while others may last for years. From 1947 to 2022, there have been 14 bear markets in the United States. According to the Investopedia report, in general, the average duration of a bear market can vary from one to nineteen months.

Globally, bear markets last an average of ten months. However, there have been examples of bear markets lasting much longer. For example, the “cryptocurrency winter” period of 2013-2015 lasted 415 days, or just over a year.

How to survive in a bear market?

First of all, we must answer the question, is it possible to make a profit in a bearish market? The answer is yes, it is possible to profit from falling markets. Just as there are strategies for investing in a bull market (a period of rising prices), there are also strategies for investing in a bear market. Some common strategies include:

The difference between a market correction and a bearish market;  What you need to know
  • Short-selling positions: This strategy is used when investors sell an asset they don’t own and hope to buy it again at a cheaper price in order to profit from the difference. However, this strategy can be risky; Because there is no guarantee that the price of the asset will decrease as predicted by the user.
  • Buying Put Options: This strategy allows investors to sell an asset at a specified price within a specified time period. buyer Option to sell Expect the share price to drop. In other words, the put option holder profits when the share price decreases.
  • Buying property at a cheap price: In general, investing is a long-term game. While there will be ups and downs along the way, sometimes bear markets provide an opportunity to buy assets at cheap prices.
  • investigation: When prices are falling, research is more important than ever. Before investing, do your research on the property you are considering. With falling prices, there will be many opportunities to buy property at the right price; But don’t forget that not all assets perform the same and some are much riskier than others.
  • Portfolio diversification: One of the best ways to deal with a bear market is to diversify your asset portfolio with different asset classes. That way, if one asset class takes a hit, it won’t drastically affect your portfolio as a whole.

Read more: put option contract and call option contract

How to tell the difference between a bear market and a market correction?

Bear markets and market corrections are a normal part of the investment process and should not be feared. If you understand the differences between these two market stages, it will be easier to recognize them when they occur. In general, the best way to navigate a bear market is to take a long-term view and stay disciplined in your investment strategy. If you are overly cautious, there are strategies such as using short positions and buying put options that can help you profit from a falling market.

During times of economic growth and development, most price cuts will be pullbacks or temporary fixes. The trick to know is to invest in cryptocurrencies during such corrections. Since initial trends are likely to be bullish when the economy is growing, prices will eventually reach new highs after the pullback. The value of assets such as stocks and digital currencies rarely go up or down in a straight line. Upswings are likely to be accompanied by periods of trend consolidation where prices slowly move against the direction of the main trend with the aim of correcting the market.

Compared to corrections and bear markets, bear markets have a higher risk of devaluing your investment portfolio. Therefore, it is imperative that you learn how to spot a bear market before it occurs. The first step is always to determine the overall state of the economy. After that, you can determine what the right reaction will be when prices start to fall.

If you’re not sure if you’re in a bear market, the best thing you can do is keep your portfolio diversified and follow your investment strategy. By keeping the portfolio diversified, even if the market falls, the possibility of losing the entire capital will be less. Also, by following your investment strategy, you know when to buy and sell regardless of market conditions.

In the table below, we summarize some of the main differences between bear markets and corrections:

The difference between a market correction and a bearish market;  What you need to know

Conclusion

Corrections and bear markets can be daunting for investors; However, don’t forget that in a healthy economy, both are normal occurrences. Learning to distinguish between the two will allow you to better tell the difference between them. Usually, a price drop of more than 20% in the market can be considered a bear market, and a price drop of 5 to 10% can be considered a short-term correction.

If we look at these corrections and bear markets in terms of recovery time, we see that markets tend to recover from corrections faster. The market correction usually ends after a few months; But bear markets cause more damage to the markets due to longer duration and more price reduction. Thus, a bear market recovery can take anywhere from a few months to a few years.

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