Capitulation, in the financial world, refers to the act of conceding defeat. In the context of the crypto market, it signifies a period of intense selling, where optimistic investors give in to become pessimistic themselves.
So, what exactly is crypto market capitulation? Let’s say a cryptocurrency experiences a sudden 30% drop in value overnight. At this point, an investor has two choices: hold onto their investment or sell it to cut their losses.
If a large number of investors decide to sell and realize their losses, it will lead to a steep decline in the cryptocurrency’s price. This selling pressure may eventually reach a point where the pessimistic investors run out of coins to sell, resulting in a price bottom.
While predicting and identifying capitulation is quite challenging, there are a few recurring market signals that can help traders anticipate such an event.
Typically, a crypto market capitulation will exhibit the following conditions:
1. Rapid and significant price crash
2. High trading volumes
3. Oversold conditions
4. High volatility
5. A notable decrease in the number of large holders
6. Negative market fundamentals
For example, when the FTX Token (FTT), the native asset of the now-defunct crypto exchange FTX, experienced a sudden collapse in November 2022, it displayed most of these signs of capitulation, as depicted in the chart below.
[Insert FTT/USD daily price chart]
It’s worth noting that cryptocurrencies, especially those with low market caps and liquidity, tend to exhibit more volatility during capitulation. However, market capitulations are not always detrimental for investors. In fact, they often present an opportunity for maximum profit as the asset price reaches its lowest point.
Bitcoin (BTC) and Ether (ETH), for instance, have encountered several market capitulation events over the years, accompanied by significant sell volumes and price bottoms. One such event was the market crash in March 2020.
So, why is crypto market capitulation significant? Many experienced traders and investors view it as an indicator of an upcoming price bottom. Therefore, they prefer to accumulate assets during a declining market, absorbing the selling pressure and setting the stage for a potential bullish reversal.
Moreover, a crypto market capitulation typically eliminates short-term sellers, gradually shifting the momentum towards entities with a long-term positive outlook. This can be observed through the consistent increase in the supply of BTC held by addresses for more than six months, often referred to as “old coins.”
[Insert Supply of BTC held by addresses for more than six months chart]
According to research conducted by Glassnode, these long-held coins are less likely to be spent on any given day.
However, it’s important to note that timing a market bottom during a capitulation event is extremely challenging, as the process can stretch over months or even years, as seen with BTC from 2014 to 2016. Traders rely on historical data and previous market bottoms, along with various metrics and indicators, to anticipate potential capitulation events.
It’s essential to remember that this article does not provide investment advice or recommendations. Every investment and trading decision involves risks, and readers should conduct their own thorough research before making any decisions.