Capitulation literally means to surrender. In finance, this term reflects a period of aggressive selling when the last bulls concede defeat and become bears.
What is a crypto market capitulation?
Let’s say a cryptocurrency drops 30% overnight. An investor is left with two options: he can continue to hold or sell to realize losses.
There would be a sharp drop in prices if most investors decided to realize their losses. Additionally, this selling pressure can lead to lower prices as bears eventually run out of coins to sell.
But while it is very difficult to predict and identify a capitulation, there are several recurring market signals that can help traders prepare for such an event.
A crypto market capitulation usually includes most of these conditions;
- Rapid decline in prices
- Large trade volumes
- Oversold conditions
- High volatility
- A large decline in the number of large owners
- Negative market fundamentals
For example, the sudden collapse of FTX Token (FTT), the main asset of the defunct crypto exchange FTX, in November 2022 accompanied most capitulation tokens, as shown in the chart below.
Cryptocurrencies, especially those with extremely low market capitalization and liquidity, will always experience greater volatility during a capitulation. But crypto market capitulations aren’t always bad for investors. On the contrary, they bring the period of maximum profit potential as the asset price decreases.
But crypto market capitulations aren’t always bad for investors. On the contrary, they bring the period of maximum profit potential as the asset price decreases.
For example, Bitcoin (BTC) and Ether (ETH) have witnessed several market capitulation events over the past eight years, accompanied by large selling volumes and price declines, such as the March 2020 market crash.
What is the significance of the crypto market capitulation?
Many experienced traders and investors see the capitulation of the crypto market as a harbinger of a price bottom. As a result, they tend to accumulate during a bear market, thus absorbing sell-side pressure and setting the stage for a potential bullish reversal ahead.
Related: Here are 3 ways the Relative Strength Index (RSI) can be used as a sell signal.
In addition, a capitulation in the crypto market usually removes short-term sellers and gradually shifts the momentum to entities with a long-term upside perspective, since almost everyone who was going to sell has already done so.
This is usually reflected in a consistent increase in the supply of Bitcoin held for more than six months in addresses called “old coins”.
These coins are less likely to be spent on any given day, Glassnode research found, noting:
“Old coins typically increase in volume during downtrends in the market, reflecting a net transfer of coin wealth from new investors and speculators to patient long-term investors (HODLers).
After all, timing a market bottom during a capitulation event is extremely difficult, as the process can take months, if not years, as was the case with Bitcoin in 2014-2016.
Traders typically rely on historical data and market precedents to predict potential capitulation events using a variety of metrics and 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.