Cryptocurrency Market Correction Explained

This past year has been a rollercoaster for the cryptocurrency market. An explosion of growth has been intermittently interrupted by sudden dips caused by panic selling and negative news.

For new-comers, choosing cryptocurrency to invest can be stomach-churning. If you own any digital tokens, you are probably feeling bouts of nausea during this current market correction in cryptocurrency.

But don’t worry. The reality is that prices need to go back to normal following the hype and excitement.

What we are witnessing at the moment is the market correction in cryptocurrency after the price turmoil of 2017.

Bitcoin reached a peak in mid-December, and although the Mother Coin is in decline right now, there is a strong possibility the price will recover.

One analyst predicts Bitcoin prices could hit $100,000 by the end of 2018. Others are more realistic and predict BTC will be worth six-figure digits in 10 years.

Prices of cryptocurrencies may be falling at the moment, but they won’t stay down for long. The cause of the fall is unknown, and while theories abound, the decline of cryptocurrency prices is probably due to some contributing factors.

But the theories are merely an excuse for the market to rest and take a breather.

The market correction the crypto space is experiencing is the best thing to do right now. While prices are low, we can anticipate future growth.

So what is a market correction in cryptocurrency and why do ICOs need this right now?

Market Correction Definition

A market correction is when prices of shares fall by at least 10% over a 52-week period.

Corrections are not bear markets. They typically last for three months whereas market crashes can linger indefinitely. Given the stock markets enjoyed multiple record-highs last year, a market correction was overdue.

The purpose of market corrections is to interrupt a steep uptrend in asset prices temporarily. The spikes in crypto assets last year is a prime example.

However, corrections don’t necessarily signal a miserable end. Stocks can remain stable in the market, and crypto assets are likely to hold their own.

For traders, the term “correction” is an indication that losses may be incurred.

However, that all depends on the price they came in every day. For early adopters of crypto-coins – and investors contemplating dipping into the market – the market correction in cryptocurrency is an opportunity to pick up assets with real value for low prices.

Market Correction In Cryptocurrency Vs Regular Market Correction

Market corrections are relatively common occurrences in the stock market. There are typically several corrections a year.

Shares need to consolidate before pushing ahead for higher highs. Every bull market in the last 40 years came after a correction. It’s a natural process in the cycle of stock markets.

Corrections usually occur because of panicked selling.

There has been a significant dump of crypto in Asia of late – which some analysts say has prompted the decline in prices. You can include concerns over regulatory crackdowns and the introduction of Bitcoin Futures on the regulated markets as contributing factors as well.

According to Vanguard Group, the US stock market is poised for a 70% correction which will be felt around the globe. The fund giant has told investors not to expect any more than four to six percent returns from stocks over the next five years.

Bitcoin has fallen more than 100% since its pre-Christmas high. However, the cryptocurrency market is not expected to drag its heels for the next five years. But, the low prices may linger for several months over fears of government regulations.

Politicians are concerned that cryptocurrency is being used to launder dirty money and avoid paying tax. Blockchain technology eliminates the capacity for criminal activity as all transactions that involve crypto assets are recorded in a public ledger.

If anything, blockchain technology makes it easier for governments to identify criminal activity. The only reason politicians are causing a stir right now is that they have been too slow to recognise the potential of digital currencies and are behind the times.

Despite their ignorance, governments in China and South Korea have taken a hardline approach in shutting down exchanges and banning trading of cryptocurrencies. The Securities and Exchange Commision has also banned the trading of some coins in the US and is in the process of enforcing regulations.

The threat of imposing regulations on ICOs is causing some panic selling, but considering the price of cryptocurrency had a sharp rise, a sudden drop is reasonable.

The equilibrium between buyers and sellers will return once traders know where they stand legally.

Banks will also have their say given they stand to lose a substantial stake in the financial markets once cryptocurrencies go mainstream. At the moment, the general line coming from financial institutions is that the technology behind cryptocurrencies is not mature.

Alex Weber, the chairman of UBS Group AG, said they would not trade Bitcoin or offer clients derivatives due to an expected drop in price prompted by government regulation. He added that the future of cryptocurrency will be undermined by market corrections and called for regulators to “zoom in” on bitcoin.

And that, my friend, is the wolf-cry of a troubled banker!

Why Do We Need a Market Correction In Cryptocurrency?

market correction in cryptocurrency

The price of Bitcoin peaked at a rapid rate. A 1400% increase is practically unheard of over a 12 month period. Uptrends of this velocity create bubbles and threaten to destabilise the economy.

Every bull market needs a correction.

According to crypto-observers, CoinDesk, the psychological support level for Bitcoin is $10,000. This is what we see right now. The declining trendline is a sensible move from traders.

However, the 5-10 moving average is sloping upwards as has breached the $11,000 threshold.

To understand why the cryptocurrency market needs correction, you only have to look at the swing of Bitcoin towards the backend of 2017.

On November 12th, Bitcoin was valued at $5,500. In a little over two weeks, the price had doubled. A month later the crypto asset was ringing in at just under $20,000.

A four-fold increase in four weeks is insane. Without a correction, the market would have spiralled out of control.

Nobody knows how deep the correction will go or how long it will last. Some speculators expect Bitcoin to hold around $10,000 until the impact of government regulations are better understood.

Forecasts based on historical data suggest prices could fall as low as $8000 during the correction period.

Altcoins are also seeing pullbacks.

Other crypto favourites including Ripple, Dash, and Ethereum all fell out of favour, although the latter is up today by 6.60% at the time of writing. However, the perspective is altcoins will continue to blossom in 2018. Upward trends typically start in Spring.

A good number of financial experts feel cryptocurrencies are overvalued. Even the co-founder of Ethereum, Vitalik Buterin, admits cryptocurrencies haven’t fulfilled their promise yet. And there have been multiple signs market prices were too high.

On the other hand, several projects in the cryptocurrency sphere look very promising.

Smart contracts on platforms such as Ethereum and NEO will establish air-tight means of trading, patenting and copyrights. The technology is also expected to help kick-start projects.

Digital coins like Monero and PIVX provide the average household with opportunities to earn interest on their investment, while projects like Ripple and TokenCard bring speed and accessibility into the equation and have the potential for digital currencies to function in the real world.

The innovation that drives digital currencies is blockchain technology. The system is housed entirely on the internet and is capable of processing transaction quickly, securely and privately. And all without having to pay transaction fees the banks charge.

Furthermore, blockchain is a decentralised system that is free from interference by government and financial institutions. Transactions take place on a peer-to-peer reviewed public ledger which is effectively self-regulating. There is little doubt that digital coins will be the currency of the future.

When Was The Last Cryptocurrency Market Correction?

cryptocurrency market change

The last significant market correction in cryptocurrency was Friday 22nd December when prices tumbled by more than 30% in 24-hours.

The correction has mostly continued over the course of the last month. Noise coming from all angles around virtual currencies indicate the market will stay balanced for the next few months.

The correction has been playing out slowly since late December. A selling spree in Asia a few days ago was the latest correction, albeit a minor one.

Not all coins are being effected either. Stellar XLM is enjoying a bullish run and according to one crypto-commentator could “break out of the charts.”

Bitcoin investors have suffered the biggest losses during the correction. The Mother Coin went from an all-time high of almost $20,000 to below $10,000. At the time of writing, BTC is trading at $11,327 and is expected to hold around this price.

Ethereum, the second grossing digital currency, also suffered massive losses after dropping almost $30bn in the market cap in a day.

Litecoin is another of the leading crypto-assets to suffer losses of almost 20% since the turn of the year.

What Are The Effects Of The Market Correction?

A stock market correction is when the market experiences a sustained fall of 10-20 percent from its 52-week high.

A crash, on the other hand, is when prices plummet by more than 10 percent in a day or a sustained drop over 20%. Historical data shows a recession typically follows that bear markets.

Media commentators claiming the crypto bubble will burst are probably saying “I told you so” right now, but digital coins keep holding despite the ongoing correction.

Unless you invested in Bitcoin in the latter half of 2017, there is nothing to panic over.

Let us throw you a fish. The best measure of a healthy economy is the job market, and according to CNN the “Europes economy is firing on all cylinders.”

According to data collected by Capital Economics, the economy in the Eurozone grew by 2.4% last year and is holding steady at the start of this year.

Confidence is at a high for the first time in nine years. A blip in the crypto market will not be enough to bring the economy crashing down.

The market correction for digital currencies has been building slowly for a month. It’s difficult to say whether it has been caused by questionable stakeholders offloading their stocks in light of impending government regulations or whether traders are trying to stabilise a bloated market that was threatening to run out of control.

Whatever the reasons are, corrections are not new for cryptocurrencies, especially around this time of year. Now that prices have levelled out, we can discount a bear market and look on this episode as a healthy correction fuelled by a chain of government bans and negative news.

Corrections only impact short-term traders or later-comers. Even the latter has a chance to recoup their losses. Digital currencies will see a recovery. Long-term investors can ignore short-term corrections.

As a matter of fact, corrections are a great time to buy high-quality stocks at low prices.

Is Market Correction a Good Thing, Then?

Yes. Market corrections can happen to any asset, and volatile markets like cryptocurrency need corrections to reign in control.

Bull markets can do wonders for trader confidence, but history shows bubbles lead to disaster. Economies have only recently recovered from the crisis brought on by the housing bubble.

Downward trends are a natural phase in the stock markets after a boom. The correction is not good news for investors that bought shares in digital currencies in the last six months, nor is it right timing for retirees planning to capitalise on their cow this winter.

Investors that can celebrate the market correction in cryptocurrency are people that have been waiting in the wings to determine public opinion on digital currencies. The explosive bull run last year suggest crypto-mania is here and is here to stay.

It is unlikely that crypto-assets will enjoy another bull market like the 2017 phenomena.

There will also be a lot of wringing out of weak projects and scams over the next few years. The blockchains that last the distance will be established coins that make a difference to online trading.

However, there is always the danger of markets blowing out of proportion again.

It could all end in a crash, but given blockchain technology is designed to guard against economic frailties, it will be an irony if cryptocurrency does bring down the markets.

For more information about potential reasons behind cryptocurrency prices falling, besides the market correction in cryptocurrency, read our article on  Bitcoin And Cryptocurrency Market Crash.