Capitulation is a key event in the crypto market – here's what you need to know

Capitulation is the process when investors collectively admit defeat in the market. Literally, it means giving up, but in the financial sphere, the term describes a period of aggressive selling of cryptocurrencies, when even the most stubborn optimists (“bulls”) turn into pessimists (“bears”). Understanding this phenomenon is critically important for any trader and investor.

What does true capitulation look like in the crypto market

Imagine: the cryptocurrency you invested in drops by 30% overnight. You face a dilemma – should you urgently sell to recover some losses, or hold on, hoping for a rebound? If most market participants decide to sell simultaneously, the price decline accelerates exponentially. Those still holding coins face crushing pressure from the mass of sellers.

Recognizing capitulation can be done through several interconnected signals:

• Huge trading volumes – the market is literally overwhelmed with sell orders
• Free fall of the price – the price drops rapidly, with little resistance
• Extreme volatility – fluctuations reach incredible scales
• Technical oversold signals – indicators show lows not seen in many years
• Negative external factors – crypto winter, regulatory blows, collapse of major projects
• Massive capital outflow – so-called “whales” are exiting the market en masse

A recent example is the FTX collapse in 2022, which was accompanied by almost all of these signs simultaneously. On TradingView charts, a classic V-shaped crash was visible, followed by a recovery. Cryptocurrencies with low capitalization and limited liquidity experience especially strong hits during capitulation – their volatility skyrockets beyond all bounds.

Why capitulation is actually an opportunity, not just a danger

Experienced traders and investors make a paradoxical conclusion: capitulation is a signal that the bottom is near. When everyone is selling in panic, wise investors take a counterintuitive step – they accumulate coins, absorbing selling pressure and laying the groundwork for a future bullish trend.

At this moment, an important phenomenon occurs: short-term speculators leave the market, and their coins transfer into the hands of long-term holders. This is visible in the dynamics of so-called “old coins” (coins held by a single address for over 6 months). Glassnode analysts noted that such coins have a very low probability of being sold in the near future. Their charts show a clear pattern: the volume of old coins always increases during bear trends.

The analysts at Glassnode named this phenomenon – it is a pure transfer of crypto capital from new investors and speculators to patient long-term holders (so-called “HODLers”). The history of Bitcoin and Ethereum over the past eight years consistently confirms this pattern. Both assets have repeatedly shown strong signs of capitulation, accompanied by mass sell-offs and deep dips. The March 2020 crash is a classic example of such a situation – and it was after this that one of the most powerful bull runs in crypto history began.

Why predicting capitulation is so difficult

However, there is one catch – identifying the exact bottom during capitulation is extremely challenging. The process can last months or even several years. Bitcoin from 2014-2016 demonstrates this most clearly – investors had to wait almost two years for relief after the major crash of 2014.

Many traders rely on historical data and previous price lows to try to predict capitulation. Various technical indicators and on-chain metrics are used for this. However, there is no magic formula – capitulation is a complex phenomenon that depends on many variables.

The key to success is understanding that capitulation is not a catastrophe, but an overreaction. It is a period when the market clears out speculators and prepares for a new phase of development. Those who have patience and calm during such storms often reap the greatest profits.