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How to Circumvent a Crypto Market Correction
Cryptocurrency markets are characterized by comparably higher volatility than stock markets. As such, a very robust bullish market may suddenly swing to rapid decline. Conversely, a bearish market may also suddenly get an upswing in prices.
Due to the comparatively higher volatility, crypto market corrections may catch many traders completely unaware. An investor may suddenly find himself in a position where a previous cash cow loses money rapidly in hours, prompting a divestment. Consequently, the price may swing back up from its correction after a short while, a lost revenue opportunity. Therefore, one needs to be equipped to survive a crypto market correction.
What’s a Crypto Market Correction?
A market correction can be defined as a rapid crypto price decrease in cryptos, normally ranging between 5-10% from a recently set peak. However, the decline could exceed 10%, with 20% being more or less the upper limit. The decrease is primarily caused by an overextended price surge on its long-term price momentum.
A correction is normally expected to be temporary, not affecting the general price momentum of the crypto asset. It’s usually immediately followed by a price recovery that potentially goes beyond the set peak.
There are, however, instances where price corrections signal a swing to bear markets. This occurs if the price decline drops by at least 20% or more, making a potential recovery during the trade period less likely.
How to Circumvent a Correction
Thanks to the high crypto price volatility, corrections are all too common. The best strategy an investor could do is to plan to overcome the potential price declines. Below are several ingenious ways;
Always Staying Up-to-Date with Market Information
No analysts can accurately predict the market’s future, but they fall close. They have the tools and knowledge to understand crypto price movements much better than the average trader. Keeping tabs on several of them could equip one with a pre-warning of potential corrections.
If one misses the analysts’ predictions, several market traders may be in the know. It is, therefore, wise to also keep tabs on the general market reactions. If most traders happen to divest at a particular time, it could be a correctional prediction one missed; hence advisable to follow suit.
Besides analysts and the general market, whales are the other constituent of the markets one should always observe. These are individuals or institutions that invest huge sums of liquidity in a cryptocurrency. As a result, their actions may influence market movements, making them potential causes of corrections.
Making Periodic Profit Withdrawals
When the going is good, the urge to let one’s assets stay put to increase the ceiling on gains sounds very profitable, which it is, only if the market trend remains .favorable
However, this scenario is not guaranteed, thanks to the volatility of the crypto market. Doing so is akin to the proverbial saying of putting one’s eggs in one basket. Once a huge price correction hits the markets, all profit gains are wiped out rapidly.
Making periodic profit withdrawals offers fewer returns overall but ensures that earnings are retained. The initial invested sum may stay as the principal figure and outside the correction.
That is provided the downswing isn’t too severe or doesn’t persist for too long. Once the value of this principle figure falls below its initial investment value, it is safe for one to withdraw their funds. It could reinvest it once prices get back to the initial level.
Adopting a Systematic Investment Plan
When carrying out crypto investments, it helps to have an investment plan that helps reduce such risks as price corrections. A Systematic Investment Plan (SIP) involves a trader committing to similar-sized investments into a crypto asset after every set period.
With periodic investment, one can buy fewer units at high prices and more units when price dips occur, like in a correction. While such a scenario reduces one’s potential asset holdings with time, it also reduces the possibility of lost value during large price dips below the initial investment.
SIP also reduces one’s potential to make poor emotion-based investment choices as influenced by market fluctuations. Market gains may make one invest everything into the crypto stock, increasing susceptibility to price dip shocks.
Hedging Against Investment Risks
To avoid falling into the pitfalls of market corrections, some of which could swing to bear territory, a crypto investor could always hedge against risks. When investors hedge risks, they offset a potential loss in certain crypto by taking an opposite position in another asset with negative correlations. It acts more or less like insurance.
Crypto Derivatives are the items best used to hedge crypto risks. These are financial contracts between trading parties, with the value of the contract being based on an agreed underlying asset.
These derivatives come in the form of;
- Swaps are agreements to exchange liabilities and cash flows from two different assets.
- Options are a right but not an obligation to a party to transact crypto at a certain price and time frame.
- Futures are an obligation to a party to transact crypto at a certain price level and time in the future.
Since hedging involves committing one’s assets to the contract at a premium, it reduces profit margins and money loss risks incurred by price dips, such as during correction.
Thanks to the price volatility of crypto assets, all investors should know what steps to take to circumvent price corrections. However, the choice of steps taken depends on the level of risk each investor can accept.
Those with time, analysis assets, and skills in assessing the market could opt for the more risky strategy of keeping tabs on the market. The more risk-averse individuals could adopt a SIP strategy or hedge their crypto assets. Making profit withdrawals falls in the middle. Combining hedging and profit withdrawals with either SIP or keeping tabs on the market would be even better.