Capitulation literally means to concede. In the financial realm, this term reflects a period of aggressive selling when the last few bulls concede defeat to become bears.
What is crypto market capitulation?
Suppose a cryptocurrency falls 30% overnight. An investor has two options: they can continue to hold or sell to realize their losses.
There would be a sharp drop in price if most investors decide to realize their losses. Also, this selling pressure could produce a price bottom as the bears eventually run out of coins to sell.
But while capitulation is very difficult to predict and identify, there are some recurring market signals that can help traders prepare for such an event.
A crypto market capitulation will typically include most of these conditions:
- rapid price drop
- Large trading volumes
- Oversold Conditions
- high volatility
- A big drop in the number of big holders
- Negative Market Fundamentals
For example, the sudden collapse of the FTX token (FTT), the native asset of the defunct crypto exchange FTX, in November 2022 accompanied most of the signs of capitulation, as shown in the chart below.
Cryptocurrencies, especially those with extremely low market caps and liquidity, will always experience increased volatility during capitulation. But crypto market capitulations are not always bad for investors. Rather, they bring the period of maximum profit opportunity as the asset price bottoms out.
But crypto market capitulations are not always bad for investors. Rather, they bring the period of maximum profit opportunity as the asset price bottoms out.
For example, Bitcoin (BTC) and ether (ETH) have witnessed several market capitulation events in the past eight years, accompanied by high sales volumes and rock bottom prices, such as the March 2020 market crash.
What is the meaning of a crypto market capitulation?
Many experienced traders and investors view a crypto market capitulation as a harbinger of a price bottom. As a result, they prefer to accumulate during a bear market, thus absorbing pressure from the selling side and setting the stage for a possible bullish reversal in the future.
Related: Here are 3 ways the Relative Strength Index (RSI) can be used as a sell signal.
Additionally, a crypto market capitulation typically removes short-term sellers and gradually shifts momentum to entities with a long-term bullish outlook, as almost everyone who was going to sell has already done so.
This is usually reflected in a steady increase in the supply of Bitcoin. in the hands of addresses for more than six monthsnicknamed "old coins".
These coins are less likely to be spent on any given day, find a Glassnode investigatepointing out:
"Old coins typically increase in volume during market downtrends, reflecting a net transfer of coin wealth from newer investors and speculators, to patient long-term investors (HODLers)."
By last, timing a market bottom during a capitulation event is extremely difficult as the process can take months, if not several years as with Bitcoin in 2014-2016.
Traders generally rely on historical data and past market bottoms to anticipate potential capitulation events using a myriad from metrics Y indicators.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
Post navigation
