Capitulation in crypto means a heavy dump in the crypto prices due to high selling followed by a significant bounce in the prices. High trading volumes are recorded during a capitulation.

The word capitulation actually means to surrender. It was generally used during the wars when the opponents surrenders to the kingdom which they attacked. During the market capitulation, investors surrender to the market and sell their assets even though they are in losses.

What is Capitulation?

Capitulation is also considered the time in the market when most investors lose their hopes of making their money back. We can only identify a capitulation after it has occurred, not during its happening. And not all drawdowns are considered capitulations.

What is capitulation in crypto

Crypto markets are more volatile than traditional markets. Drawdowns often occur. The Crypto market generally follows the price action of Bitcoin in the short term. So any fall in Bitcoin affects the whole crypto market. But capitulation can occur in any cryptocurrency irrespective of the market condition.

Capitulation in Real Life

Bitcoin hit an all-time high price of $69,000 in November 2021. After that there was a huge sell-off in April 2022 when the price fell from $47,000 to a price below $40,000, the price bounced back a little again to fall below $20,000 in June 2022. The trading volumes are very high in June compared to that in April and there is a significant bounce from the bottom of $17,600 in April 2022. Bitcoin is currently trading at over $22,000. The price action in April can be considered a capitulation event if the price won't go below $17,600.

Capitulation means that everyone who has to sell has sold and the investors who hadn't experienced losses before or have a different view of the market buy at those prices which will lead to a bounce in the price.

The event in March 2020 can be said as a capitulation event as the price never fell below $5,000 again and Bitcoin went up only since then. Capitulation is not a trading indicator, trading decisions are not to be taken based on these capitulation events but it helps you understand whether the markets bottomed or not.

Why does Capitulation occur in Crypto?

There can be a number of reasons why capitulation happens in crypto. Some of the reasons are

  • Correlation with the traditional markets which are correlated with the global events. Bitcoin has a significant correlation with S&P 500 and tech stocks. Any drawdown in S&P 500 due to global circumstances like Coronavirus or Russia invading Ukraine can have an effect on the crypto market too
  • Bitcoin market cycles. Bitcoin halvings occur once in four years. Similarly, bull and bear markets occur along these halving cycles. Capitulation can occur at the end of bull or bear markets. In June 2021, a capitulation event occurred during the period of relocation of hash rate from China, as China banned Bitcoin mining
  • Major liquidation event. Crypto markets are highly leveraged. Over-leverage can lead to capitulation events liquidating billions of dollars in longs
  • The burst of Ponzis. Crypto markets are full of dubious ponzis. When the Luna and UST Ponzi unraveled, Bitcoin price tanked as Luna Foundation Guard(LFG) has to sell its Bitcoin and many funds like 3AC, Voyager Digital and Celsius went bust. That was definitely a capitulation of LUNA coin as it almost went to zero

Capitulation doesn't last forever and there will be some good opportunities for investors during a capitulation. However, it can be only identified in the hindsight.

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