In the crypto industry, the terms 'crash' and 'correction' are used quite often, sometimes even interchangeably. It might surprise you, but both these terms actually mean very different things. So, tag along as we explain crypto crashes and corrections and how they differ from each other.
What's 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 an outcome of some breaking 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 the operations of a prominent crypto exchange called Bitfloor, bitcoin registered its biggest crash of over 70 percent. The price of bitcoin fell from $260 to about $70. While bitcoin took less than six months to bounce back with a 900 per cent uptick, the sudden fall wiped out significant market capital.
Black Thursday
The second 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 by 40 percent following the announcement, plummeting from $7,969 to $4,776.
Also Read: A look at Tornado Cash, the coin mixer which allegedly laundered $7B worth virtual currency
What's 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 to support 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 peaks.
Differences between a crash and a correction
The most obvious difference between these price dips is the duration. Crashes occur quickly, whereas corrections take time. The next point of difference is the cause. Crashes are generally caused by large events that sway prices quickly and sharply. On the other hand, corrections are usually set off by technical factors such as strong resistance levels, decreased trading volume and so on.
Another major point of difference is market sentiment. Corrections are cyclical in nature 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 could result in panic selling.
Finally, the aftermath of a crash and correction also differs. Often, crashes are followed by a bear market and a prolonged period of falling prices. In contrast, corrections can lead to a healthy uptrend where prices retest a former high.
Conclusion
Both crashes and corrections cannot be predicted. However, knowing the difference between the two can help you make better investment/trading decisions. Moreover, in the case of both downtrends, it is important to maintain a long-term strategy. This will help you ride out the lows and benefit from the gradual rise in prices over time.
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