A correction is a pullback of an asset’s price of at least 10% to adjust for over-valuation.
What is a Correction?
There is no strict definition of a correction, but it is commonly used to describe a rapid decrease of at least 10% in the price of an asset from a recently achieved peak. It is called a correction because it usually returns the price from an abnormal surge to its long-term established trend.
Corrections are usually followed by recoveries, but they may also lead to more prolonged periods of decline called bear markets when prices can drop by 20% or more. For example, according to the data of the financial services company Charles Schwab, there were 24 corrections in the S&P 500 stock market index during the period from November 1974 to February 2020, only five of which have resulted in bear markets.
In the cryptocurrency market, corrections of 5-10% are significantly more frequent than in the stock and other traditional markets, owing to its characteristically high volatility. However, they tend to be balanced out by similarly frequent recoveries, and the overall trend of most major coins since the inception of the market in 2009 has been a bullish one.
As an example, Bitcoin’s (BTC) price grew from as little as $0.003 per coin in 2010 to more than $19,000 in 2020, despite at times suffering corrections of as much as 50% in the span of a single day.