What is capitulation in the crypto market and its meaning

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

What is capitulation in the crypto market?

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 will be a sharp price drop if most investors decide to realize their losses. Additionally, this selling pressure can provide a price bottom as the bears eventually run out of coins to sell.

However, while it is very difficult to predict and identify capitulation, there are a few recurring market signals that can help traders prepare for such an event.

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

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

For example, the sudden collapse of FTX Token (FTT), the original 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 capitulations in the crypto market are not always bad for investors. On the contrary, they bring the period of maximum profit opportunity as the asset price bottoms out.

But capitulations in the crypto market are not always bad for investors. On the contrary, they bring the period of maximum profit opportunity as 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 bottoms, such as the March 2020 market crash.

What is the significance of a capitulation in the crypto market?

Many experienced traders and investors see a capitulation in the crypto market as a predictor of a price bottom. As a result, they prefer to accumulate during a falling market, thus absorbing the selling pressure and creating the basis for a potential bullish reversal ahead.

Related: Here are 3 ways the Relative Strength Index (RSI) can be used as a sell signal

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

This is usually reflected in a consistent increase of the Bitcoin supply held by addresses for more than six months, called “old coins.”

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

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

“Old coins typically swell in volume during bearish market trends, reflecting a net transfer of coin wealth from newer investors and speculators, back to patient long-term investors (HODLers).”

Ultimately, it is extremely difficult to time a market bottom during a capitulation event, as the process can take months, if not years, as with Bitcoin in 2014-2016.

Traders typically rely on historical data and past market bottoms to predict 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.