Capitulation literally means to concede. In financial terms, this term reflects a period of aggressive selling in which the last remaining bulls concede defeat and become bears.
What is cryptocurrency market capitulation?
Suppose a cryptocurrency falls 30% overnight. The investor is left with two options: continue to hold it or sell it to recoup the losses.
A sharp drop in price would ensue if the majority of investors decide to materialize their losses. Furthermore, this selling pressure could produce a bottom in the price as the bears eventually run out of coins to sell.
But while a capitulation is very difficult to predict and identify, there are some recurring market signals that can help traders prepare for such an event.
A cryptocurrency market capitulation will typically include most of these conditions:
- rapidly falling prices
- Large trade volumes
- Oversold Conditions
- high volatility
- A significant decrease in the number of holders
- negative foundations
For example, the sudden collapse of FTX Token (FTT), the native asset of the defunct FTX exchange, in November 2022 accompanied most signs of capitulation, as shown in the chart below.
Cryptocurrencies, especially those with extremely low market capitalization and liquidity, will always experience increased volatility during capitulations. But cryptocurrency market capitulations are not always bad for investors. Rather, they bring with them a period of maximum profit opportunities when the asset price bottoms out.
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 lows, such as the March 2020 market crash.
What is the significance of a cryptocurrency market capitulation?
Many experienced traders and investors view a cryptocurrency market capitulation as a harbinger of a price bottom. Consequently, they prefer to accumulate during a bear market, thus absorbing selling pressure and setting the stage for a potential bullish reversal in the future.
In addition, a capitulation of the cryptocurrency market often removes short-term sellers and gradually shifts momentum towards entities with long-term bullish prospects, as almost everyone who was going to sell has already done so.
This is typically reflected in a steady increase in the supply of Bitcoin held by addresses for more than six months, dubbed “old coins.”
According to a Glassnode study, these coins are less likely to be spent on any given day:
“Old coins tend to swell in volume during market downtrends, reflecting a net transfer of coin wealth from new investors and speculators to longer-term patient investors (HODLers).”
Ultimately, timing a market bottom during a capitulation event is extremely difficult, as the process can take months, if not several years, as was the case with Bitcoin from 2014 to 2016.
Traders typically rely on historical data and previous market lows to anticipate potential capitulations using a myriad of metrics and indicators.
This article does not contain investment advice or recommendations. All investments and trades carry risks, so readers should do their own research when making a decision.
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