Capitulation, in financial terms, refers to the act of conceding defeat. In the world of cryptocurrencies, it signifies a period of intense selling where bullish investors give in and become bearish themselves.
So, what exactly is crypto market capitulation? Let’s say a cryptocurrency experiences a sudden 30% drop in value overnight. In such a situation, an investor has two options: either continue to hold onto their investment or sell it to cut their losses.
If a large number of investors choose to sell and realize their losses, it can lead to a sharp decline in price. This selling pressure may even create a price bottom, indicating that bearish investors have run out of coins to sell.
While predicting and identifying capitulation is extremely challenging, there are a few recurring market signals that can help traders prepare for such an event. These signals include a rapid crash in prices, high trading volumes, oversold conditions, heightened volatility, a significant decrease in the number of large holders, and negative market fundamentals.
For example, the sudden collapse of the FTX Token (FTT), the native asset of the now-defunct crypto exchange FTX, in November 2022 exhibited most of these signs of capitulation, as shown in the chart below.
Cryptocurrencies, especially those with low market caps and liquidity, tend to experience greater volatility during capitulation. However, crypto market capitulations are not always detrimental for investors. On the contrary, they can present maximum profit opportunities as the asset price reaches its lowest point.
Bitcoin (BTC) and Ether (ETH) have both witnessed multiple market capitulation events over the years, accompanied by large sell volumes and price bottoms. One notable event was the market crash in March 2020.
So, what is the significance of a crypto market capitulation? Many experienced traders and investors view it as an indicator of an impending price bottom. Consequently, they prefer to accumulate assets during a declining market, absorbing the selling pressure and potentially paving the way for a bullish reversal.
Furthermore, a crypto market capitulation typically eliminates short-term sellers and gradually shifts the momentum towards entities with a long-term optimistic outlook. This shift is often reflected in the consistent rise of Bitcoin supply held by addresses for more than six months, commonly referred to as “old coins.”
According to research conducted by Glassnode, these long-term held coins are less likely to be spent on any given day.
However, timing a market bottom during a capitulation event is incredibly challenging, as the process can take months, if not years, as was the case with Bitcoin from 2014 to 2016. Traders rely on historical data and previous market bottoms to anticipate potential capitulation events using various metrics and indicators.
It is important to note that this article does not offer investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.