When investing in stocks or cryptocurrencies, there will inevitably be a so-called correction. As its name suggests, it is an event that corrects some errors in the market. In other words, it means that an asset was overvalued and a sudden drop in its value happened.
In order to better understand this phenomenon of correction, we will see together the reasons that can lead to this. We will also tell you what approach you should use when faced with such a situation.
Why does such an event occur?
Corrections are completely natural things in the world of finance and cryptos. If you invest in these sectors, be aware that you will not be able to escape them and that sooner or later you will be confronted with such events. It can be said that this is an integral part of certain economic cycles.
A correction takes place when the price of a classic or digital asset is much higher than its true value. This may be due to massive speculation by investors on a crypto that has no working product yet but has made big promises or it may be due to prices surging faster than the expected future profits of the asset in question.
When investors find that a cryptocurrency is overvalued, they may then decide to sell it back in order to pocket short-term profits. If many people are selling at the same time, then this causes the prices to plunge until the moment when other investors believe that the price is very interesting and then start to buy the asset in question massively, which this time makes it possible to stabilize or to raise the price.
Should you sell during a correction?
When a correction takes place, it has a negative impact on prices. Depending on the digital assets considered, the impact can be more or less significant. We sometimes speak of a few percent, mainly in the classic markets, to more than 50% when it takes place in the crypto market.
Faced with a sudden drop in prices, one might therefore be tempted to think that the price may perhaps reach 0. As a result, some crypto-investors may decide to sell as quickly as possible before their digital assets are no longer worth anything. everything. Unfortunately, this is called a panic sell and it’s usually not a good solution.
If you regularly monitor a crypto project in which you have invested and you have not seen any negative news about the project, it is very likely that the price drop is only temporary. If you sell at the bottom, then you will realize a deadweight loss. The ideal would therefore be to sell at the highest but, unfortunately, it is impossible to know when we have reached too high a value which will induce a correction.
Is it desirable to invest more money during such a period?
If you firmly believe in the project in which you have invested, then it may be worth considering strengthening your positions. Indeed, if the price has undergone a correction and the project is promising, it is a safe bet that many investors will consider this an excellent opportunity to obtain more cryptocurrencies at an attractive price. .
If you are sure that you are indeed facing a correction, that is to say that you have analyzed the various reasons that may have led to a fall in prices and you have not detected anything in particular, it is this is a good opportunity for you to invest even more money on the project.
However, you have to be careful not to get too involved in a particular project. You should always keep in mind that diversification is important and that you should not be too exposed to a particular cryptocurrency. Remember to always balance the sums you invest between the different projects you monitor.
Conclusion on the correction
We hope you have a better understanding of the concept of correction. As we have seen, this event can unfold both in the classic market and in the blockchain industry. It is in a way something that is an integral part of economic cycles and that you absolutely have to learn to master in order not to make investment mistakes.
During a correction, it is important not to panic, at the risk of selling your digital assets with big losses. It is even recommended to strengthen your positions if you are certain that it is indeed a correction and not negative news that has caused prices to fall.
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