Decoding the crypto lingo: How a Bitcoin crash is different from a correction

June 23, 2021
Bitcoin has become one of the world’s best-performing assets over the past couple of years. However, even the highest return generating asset has its ebbs and flows. Over the past decade, Bitcoin witnessed immense growth by over a million times in value and popularity.

CoinSwitch Kuber saw nearly 6 million Indians onboard the platform. Yet, it has had its fair share of crashes and corrections in the market. When the price of this digital currency declines, it is not uncommon for people to use words like “crash” and “correction” interchangeably. More often than not, investors mistake a crash for a correction despite the two terms carrying different meanings altogether.

What happened to Bitcoin lately?

The entire crypto market, including the largest cryptocurrency ‘Bitcoin’, witnessed phenomenal growth between December 2020 and April 2021. The currency grew a staggering 600% in six months and was valued at nearly $2 trillion at that time. It has been a bleak couple of months for the infamously volatile digital currency. The price of Bitcoin reduced by 30% at one point when the China Banking Association issued a warning to its member banks of the risks associated with digital currencies. Although the decline narrowed below 10% on the same day, Bitcoin’s market value dropped nearly $70 billion within a day.

According to Coinmarket cap, Bitcoin lost nearly 32% of its value in the past three months after touching its all-time high of $64,800 but is still up 300% since last year. According to a Reuters report, the fall in the price of Bitcoin was triggered by:

  1. China’s ban on financial institutions from providing services relating to cryptocurrency.
  2. Elon Musk's tweets around the environmental sustainability concerns surrounding Bitcoin.
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Since Bitcoin has fallen to nearly half of its all-time high value, most investors fear that we are in the middle of a Bitcoin crash similar to the Black Thursday Crash of March 2020. On the other hand, analysts and investors suggest that the dip is merely a correction in the crypto market.

What is a Crash?

In traditional finance, an asset is crashing if its price drops by over 10% within a single day. Crashes are often triggered by impactful and sudden moves in the cryptocurrency market that could cause panic among the investors who exit the market en masse. For example, when Elon Musk tweeted about the sustenance of Bitcoin environmentally. While technical factors like demand play a vital role in Bitcoin’s price, other fundamental factors such as macroeconomic events, sudden implementation of regulatory changes or significant company announcements could cause a large crash in the market.

The crash that took place on April 10, 2013, is the most significant crash by far. It happened shortly after the U.S. Financial Crimes Enforcement Network (FinCEN) pulled the shutters on the Bitfloor crypto exchange and announced that Crypto exchanges are required to register themselves as a “money transmitter”. During this time, Bitcoin prices sank over 73.1% within 24 hours, from a high of $ 259.34 to nearly $70.

One of the most recent examples of a crash is what we call the “Black Thursday” crash of March 12, 2020. After the World Health Organization declared the Coronavirus as a global pandemic, the value of Bitcoin plummeted by 40%, from $7,969.90 to $4,776.59.

What is a Correction?
Generally, any drop in the price of an asset is characterized as a correction when prices fall more than 10% from a recent peak over several days.

Sometimes, investors tend to overvalue the price of Bitcoin. In such cases, the market tends to correct itself when bullishness gets exhausted, and traders need time to consolidate and recover. When most buyers have bought the asset and very few new buyers support the uptrend, exhaustion occurs. Prices start dropping when sale orders pile up, and the order book does not get enough buy order entries to match them.

Corrections are often initiated by minor events and technical factors such as buyers in the market-facing intense resistance levels, low trading volumes etc. During technical analysis, it can often be detected with indicators like RSI (Relative Strength Index) or Fear and Greed Index.

Should investors be worried?

Volatility in Bitcoin is not a phenomenon but is one of its prominent features. That means it is normal for its prices to fluctuate up and down rapidly. Analysts believe that the current dip in price could be a healthy correction and could be a good time to invest in the crypto market.

It is not the first time that Bitcoin is witnessing such a steep fall in prices. Though a 40% drop in its value looks dramatic, it is pretty typical in volatile markets, especially after a massive bull run of over 600% rise in value. Even though Bitcoin witnessed over an 80% price drop in a single day in the past, its value bounced back over ten times shortly.

At the time of writing, the value of BTC was approximately Rs 30,00,000. Although the longest bull run seems to have halted, Bitcoin’s value is still 300% higher than last year. If someone had invested Rs 100 a year ago, they would have earned a profit of Rs 300. Looking at the past, Bitcoin has always bounced back in value over the long run.

Unfortunately, most investors tend to think short term when it comes to cryptocurrencies which is another cause for their volatility. The asset is just a decade old and is yet at the nascent stage of growth. Hence, there could be sharp highs and lows along the way. If you plan to hold Bitcoin for the long term, the chances are high that you could reap good returns in future. Platforms like
CoinSwitch Kuber
have simplified crypto investing, especially for those looking to hold the asset for a substantial period.

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