Monday, July 22, 2024
Market Analysis

What is crypto market capitulation and its significance

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

What is crypto market capitulation?

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

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

But while it’s very difficult to predict and identify capitulation, 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 condition:

  • Rapid price crash
  • Large trading volumes
  • Oversold conditions
  • High volatility
  • A big drop in the number of large holders
  • Negative market fundamentals

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

FTT/USD daily price chart. Source: TradingView

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

For instance, Bitcoin (BTC) and Ether (ETH) have witnessed several market capitulation events in the past eight years, accompanied by large sell-volumes and price bottoms, such as the market crash of March 2020

What is the significance of a crypto market capitulation?

Many experienced traders and investors see a crypto market capitulation as a foreteller of a price bottom. As a result, they prefer to accumulate during a declining market, thus absorbing the sell-side pressure and creating grounds for a potential bullish reversal ahead. 

Related: Here’s 3 ways the relative strength index (RSI) can be used as a sell signal

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

This is typically reflected in a consistent rise of Bitcoin supply held by addresses for more than six months, dubbed “old coins.” 

Bitcoin old supply last active > 6m. Source: Glassnode

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

“Old Coins typically swell in volume during bearish market trends, reflecting a net transfer of coin wealth from newer investors and speculators, back towards patient longer-term 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 with Bitcoin in 2014-2016.

Traders typically rely on historic data and previous market bottoms to anticipate potential capitulation 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.

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