What is Crypto Market Capitulation and What Does It Mean

[ad_1]

Capitulation literally means to concede. In the financial sphere, this term reflects a period of aggressive selling when the last of the bulls concedes defeat to become bearish themselves.

What is the Crypto Market Capitulation?

Suppose a cryptocurrency drops 30% overnight. An investor is left with two options: he can continue to hold or sell to realize the losses.

There would be a sharp drop in prices if most investors decide to realize their losses. Additionally, this selling pressure could produce a bottom in price as the bears eventually run out of coins to sell.

But while predicting and identifying a breakout is very difficult, there are a few recurring market signals that can help traders prepare for such an event.

A crypto market capitulation will typically include most of these conditions:

Rapidly falling prices Large trading volumes Oversold conditions High volatility A sharp decline in the number of large holders Negative market fundamentals

For example, the sudden collapse of the FTX Token (FTT), the native asset of former crypto exchange FTX, in November 2022 accompanied most signs of capitulation, as seen in the chart below.

FTT/USD daily price chart. Source: Trading View

Cryptocurrencies, especially those with extremely low market capitalization and liquidity, will always experience greater volatility during the capitulation. But crypto market capitulations are not always bad for investors. On the contrary, they bring the period of maximum profit opportunity when the asset price bottoms out.

But crypto market capitulations are not always bad for investors. On the contrary, they bring the period of maximum profit opportunity when the asset price bottoms out.

For example, Bitcoin (BTC) and Ether (ETH) have experienced several market capitulation events over the past eight years, accompanied by large selling volumes and low prices, such as the March 2020 stock market crash.

What is the significance of a crypto market capitulation?

Many experienced traders and investors see a crypto market capitulation as a harbinger of a price bottom. As a result, they prefer to accumulate during a falling market, thereby absorbing the pressure from the sell side and laying the groundwork for a potential bullish reversal to come.

Related:Here Are 3 Ways the Relative Strength Index (RSI) Can Be Used as a Sell Signal

Additionally, a capitulation in the crypto market typically removes short-term sellers and gradually shifts momentum to entities with a long-term upside prospect since nearly everyone who was going to sell has already done so.

This usually results in a steady increase in the supply of bitcoins held by addresses for more than six months, referred to as “old coins”.

The old bitcoin supply has been active for over 6m. Source: Glassnode

These coins are less likely to be spent on any given day, according to research from Glassnode, noting:

“Old coins typically increase 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 or even years like with Bitcoin in 2014-2016.

Traders typically rely on historical data and prior market lows to anticipate potential sellout events using a myriad of metrics and indicators.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

[ad_2]