Discover more from DEFI TIMES Newsletter
Three Reasons Why Pullbacks Are Healthy - SUNDAY THOUGHTS
Listen to the audio version of this article!
Hey DEFI TIMES community,
We had a decent pullback on Monday; almost all cryptocurrencies corrected by 20-30%. It felt like a bloodbath for people who are new to the crypto space.
Bitcoin crashed from $42,000 to slightly below $30,000. It was especially painful for newcomers. For the first time since 2017, we had a significant number of new people buying Bitcoin and ETH. These people only experienced skyrocketing prices so far, but crypto can be ruthless sometimes. Many people were washed out in a matter of days.
We get a lot of questions about whether this bull market could be over at this point. Are we in a similar situation to December 2017, after which we saw a 3-year long bear market? Could this be the peak of the bull market in 2021?
Most likely not. I believe we are still early in this bull market: relatively in Q1-Q2 2017.
Today, I want to explain why this correction is exceptionally healthy for the market. I will give you three reasons why this dip is a net positive.
Subscribe to our newsletter to level up your crypto game!
1. Corrections wash out the greedy
Corrections keep the bull market going. When we see drastic price increases like during the last couple of weeks, many newcomers join the space.
A parabolic move occurs over several weeks. Parabolic moves tend to get stronger at the end. More and more people are joining, and fresh capital is entering the industry.
As we break an all-time high after the other, no single entity is at a loss. Every single piece of a Bitcoin was purchased at a lower price.
There will always be people taking profits. Even if you believe Bitcoin will appreciate over the next couple of years, it can still be a good idea to take out your initial investment.
That’s how parabolic moves come to an end. Greedy newcomers, who have been speculating on a quick buck, are washed out quickly.
Bitcoin is transferred from weak hands to strong hands. Prices correct and stabilize at a lower price level.
At this point, we are ready for another bull cycle.
Corrections always happen at some point. If it hadn’t happened this week, it would have occurred at some point in the future! And the higher prices go, the deeper they fall.
Corrections stop the market from overheating. Corrections wash out weak hands. Corrections are healthy and keep the momentum going over a long period.
2. We were close to euphoria
Take a look at the Fear & Greed Index. Over several weeks and months, the index always showed a number of 90-99. We haven’t seen this kind of greed since the bull market of 2017.
During the last couple of days, the index has consolidated.
Take a moment to reflect on your emotions during late December and early January. Have you been overly optimistic? Did you become greedy? Did you take profits?
The fear and greed index usually is a good indicator of local tops, and each time the small bubble pops, we reach decent levels again.
People lose money, dumb money gets washed out, and people start to doubt crypto again.
The fact that the index has significantly corrected is extremely bullish to me. As a rule of thumb: when it goes down, buy. When it goes up, sell.
But remember, this only works during bull markets.
3. Retesting lower price levels
Corrections test lower price levels. When prices climb higher and higher during a parabolic move, people get used to new all-time highs.
Have you ever looked at your Blockfolio hitting new all-time highs and felt terrible when it dipped below again? That’s how human psychology works. When markets drop, we consider new prices as “cheap.”
So when we see a significant correction, people start to repurchase at lower prices. The “dip gets bought.”
That’s one of the most bullish indicators in any bull market, especially in crypto bull markets: lower price levels are retested. The market creates another local bottom, which is then considered a support level to the downside.
That’s how prices stabilize and can continue going up in the long run.
Especially if you are new to the crypto industry, don’t panic during corrections. You will see them quite often during the next couple of months. Take a look at the bull market in 2017.
One correction after the another occurred. What happened afterward? The market retested higher lows, confirmed them, and continued to go up.
Corrections are important. They keep the bull market alive. They are essential to keep up to bullish sentiment over several months or years. Don’t be scared when they happen. Embrace them. Use them to your advantage. Buy the dip =)
Markets are emotional. When you see overly pessimistic price drops, take a moment, and think about whether the bull market could be over. Here are some signs:
- Your grandpa asks you about Bitcoin and wants to invest
- Uber drivers talk about how much money they made with IOTA
- People complain they only made 4-5x last month
That’s the danger zone. As long as it doesn’t happen, dips are net positive for the market. Greedy people are washed out, euphoria is avoided, and lower support levels can be created.
Prices pumped again after our most recent correction on Monday.
Of course, none of this is financial advice. Now, let us know whether you bought the dip on Monday. Our Twitter DMs are always open. We read every single message and try to answer all of them!
All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.