Several reasons can trigger a market correction in cryptocurrencies, such as overenthusiastic investors, regulatory uncertainty or marketwide sell-offs.
Some of the most common triggers include:
- Excessive speculation and investor exuberance: When investors get too excited about a particular asset, they tend to push prices too high, too fast, which can create an unsustainable bubble that eventually pops, leading to a market correction.
- FOMO (fear of missing out): When investors see prices rising quickly, they may jump into the market without proper research, thereby creating a self-fulfilling prophecy where prices continue to increase simply because more people are buying.
- Exchanges getting hacked: If a major exchange gets hacked and loses a significant amount of investors’ money, it can trigger a marketwide sell-off and correction.
- Regulatory uncertainty: Any time there is regulatory uncertainty surrounding cryptocurrency, it can lead to a sell-off and corrections. For example, prices fell sharply when China announced it was cracking down on cryptocurrency in 2017.
What is a pullback in crypto?
Slightly different from corrections, pullbacks are temporary pauses or reverses in the overall value trend of an asset.
In crypto, pullbacks are relatively common and can happen several times during an uptrend or downtrend. Pullbacks are generally considered a healthy part of the market cycle as they allow the market to digest gains (or losses) and reset before moving higher (or lower).
Cryptocurrency pullbacks mean the temporary reversal will only stop, increase or decrease in value for a brief period, after which the asset’s value will return to its original behaviour.