Capitulation

November 21, 2023 - Around 2 mins mins to read

Understanding Capitulation

Capitulation is the deliberate decision to sell assets, either partially or completely, at a loss due to a significant price drop, with the belief that the price will not recover. While the term traditionally signifies surrendering power, its meaning in finance and trading is different.

Both traditional stock trading and cryptocurrency trading involve a substantial amount of risk. Prices fluctuate, and investors rarely have certainty about the direction their investments will take. Therefore, it is essential to consider the possibility of an investment portfolio losing half of its value.

Some argue that cryptocurrency trading is even riskier due to the decentralized nature of the market. A market without a central governing body is more vulnerable to manipulation and external influences, leading to significant changes in token valuations. Although most cryptocurrencies have intrinsic value, it is important to acknowledge the occurrence of crypto winters and bear markets since the launch of Bitcoin in 2009.

Due to the high volatility in the cryptocurrency sector, capitulation is more likely among crypto traders. Unfortunately, crypto tokens can quickly lose value, causing investors to doubt their ability to wait for a recovery and sell at a profit. When an asset is sold at a loss, regardless of the extent of its value drop, it is considered capitulation.

The past two years, 2020 and 2021, have been an emotional rollercoaster for crypto traders, especially those invested in Bitcoin. Although the token reached its all-time high in April 2021, its price rapidly dropped a few weeks later. As a result of the market shift and Bitcoin’s underperformance, many investors chose to sell some or all of their Bitcoin holdings at a loss. This mass sell-off of Bitcoin tokens further contributed to the decline in BTC’s price. Unfortunately, when capitulation occurs on a larger scale, it can trigger additional crashes in the asset’s price.