Crypto markets are known to be cyclical. As such, price drops are usually followed by booms and vice versa. This presents a lucrative opportunity for investors. Those who can efficiently time the market would be able to acquire tokens at the right time and price, thereby earning handsome returns in the long run. However, this is easier said than done, as there are several different phases in the crypto market cycle and correctly identifying them is a difficult task.
Perhaps the most important phase of a crypto market cycle is the capitulation period. It presents investors with an opportunity to buy into the market when prices are lower and ride the wave when prices begin to rally again. It also rids the market of speculators and short-term investors, thereby building a stronger base around the crypto industry. But what is crypto market capitulation, why is it important and how to identify one? Tag along to find out.
What is crypto market capitulation?
Crypto market capitulation refers to a phase of panic selling and declining prices. During this period, investors exit their positions by selling as quickly as possible. This causes prices to drop lower and lower. Capitulation eventually comes to an end when the bulls have no more assets to sell. This results in a price bottom. This can be followed by a period of sideways movement, where prices hover within range. Or it can lead to an upward trend and the start of a bull market.
The panic selling caused due to the COVID-19 pandemic and lockdowns is a good example of a crypto market capitulation. Bitcoin dropped from the $10,300 range in mid-Feb 2020 to the $5,000 range by mid-March. However, prices eventually recovered and rallied to the $27,400 range by the end of the year. This is a classic example of a crypto market capitulation that eventually led to a price boom.
What is the significance of crypto market capitulations?
During a crypto market capitulation, speculators and short-term investors usually exit their positions. However, at the same time, long-term investors usually enter the market. This is because experienced, long-term investors will see a downturn as an opportunity to purchase tokens at lower prices. Thus, ownership is transferred from speculators to HODLERs.
"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)," said crypto research firm, Glassnode, in a research report. Therefore, crypto market capitulations weed out speculators and help build a stronger investor base around the crypto industry.
Also Read: Three finance and tech giants that Bitcoin has surpassed in terms of market cap this year
How to identify a crypto market capitulation?
Spotting a crypto market capitulation, especially a price bottom, is easier said than done. There is no telling how long it will take for the market to bottom out. Moreover, it’s next to impossible to tell if a given price point is the bottom or not. However, some signs of a market capitulation include rapid price drops accompanied by large trading volumes, leading to oversold conditions. These periods will also see a drop in whale accounts and high volatility. Additionally, a period of sideways movement after a rapid price decline could point toward a price bottom.
Conclusion
A crypto market capitulation is marked by panic selling and price drops. However, it is not all doom and gloom as prices tend to rebound after bottoming out. Having said that, spotting a market capitulation and bottom is not easy as these phases can take months or even years to play out. Moreover, not all capitulation periods lead to market booms. Therefore, it is important to do your own research and invest only as much as you can afford to lose completely.
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