Correction in the cryptocurrency market: its essence and signs

The concept of correction

In the context of the cryptocurrency market, a correction refers to a short-term decrease in the value of an asset within the overall trend. Typically, a correction occurs after a significant rise when market participants realize their profits, leading to a temporary pullback in price by several percentage points. This process helps to balance excessive supply or demand pressure, creating the conditions for more sustainable growth in the future.

Corrections usually range from 10% to 30% of the preceding growth and play an important role in forming a healthier price dynamic.

Signs of the beginning of a correction

A correction can be distinguished from a market crash by the scale and duration of the decline. Typically, it lasts from several days to a couple of weeks, after which the price stabilizes or resumes its growth. To identify a correction, traders use technical analysis methods, including indicators such as support and resistance levels, RSI ( relative strength index ), and moving averages.

For example, when the RSI value exceeds 70 (, indicating overbought conditions ), there is a high probability of a price decline soon. Traders also pay attention to support lines, around which the price may temporarily halt its decline.

Examples of corrections in the cryptocurrency market

1. Bitcoin Correction in January 2021

At the beginning of 2021, Bitcoin reached a new all-time high of around $42,000, after which a correction of about 25% followed. By mid-January, the price had dropped to $30,000, but then began to rise again. This was a typical correction caused by profit-taking after the rapid growth that started in late 2020.

2. Ethereum Correction in May 2021

In May 2021, ETH reached a peak of $4,300, after which it sharply fell to $2,100. This decline of more than 50% was due to a general downturn in the cryptocurrency market, but in the long term, it turned out to be a correction, as the price began to stabilize and rise again the following month.

3. Correction in the Altcoin Market in Summer 2023

In July 2023, when many altcoins like SOL and ADA reached their peak values, a correction of about 20-25% followed. During that period, a significant portion of the cryptocurrency market capitalization was concentrated in Bitcoin, leading to increased volatility in the altcoin market. After that, the market stabilized, and by September, prices began to gradually recover.

The reasons for corrections in the cryptocurrency market can vary, including:

• Realization of profits. When prices reach new highs, many traders begin to sell assets to lock in profits, which causes a temporary decrease in price.

• Regulatory News. Statements regarding cryptocurrency regulation, especially in major economies, can lead to corrections as traders react to potential changes.

• The overall economic situation. Economic instability, rising interest rates, inflation, or changes in monetary policy can affect the cryptocurrency market and trigger corrections.

Using correction in trading strategy

1. Buying on a Dip. Traders often consider corrections as an opportunity to buy an asset at a better price. It is important to note that this strategy is effective only in the case of an uptrend. For example, if the asset you are interested in retraces from $30,000 to $25,000 after a rise, this could be a good buying opportunity provided that the long-term trend remains upward.

2. Analysis of support and resistance levels. During a correction, traders pay attention to key support levels that may indicate the end of the correction and the beginning of a new impulse. For example, if an asset is at a support zone at $2,500 after falling from $3,000, this could be a signal to buy if the price rebounds from this level.

3. Use of Indicators. Indicators such as RSI and MACD help assess the level of overbought or oversold conditions of an asset. It is important to remember that if an indicator signals oversold conditions, this may indicate a possible end to the correction.