What Is Capitulation?
Capitulation is the deliberate decision to sell all or part of your assets at a loss because you don’t believe the price will rise again. Capitulation in the classical sense relates to the act of relinquishing authority; nevertheless, in finance and trading, the term has a quite different connotation.
Traditional stock market trading, for example, as well as cryptocurrency trading, both carry a large amount of risk. Prices fluctuate, but traders rarely have a guarantee as to which way their investment will go. Given this, the possibility of your investment portfolio losing half of its value should not be discounted.
Cryptocurrency trading, according to others, is significantly risky because of the market’s decentralized character. Because a market that is not regulated by a central governing body is considerably more prone to manipulation or large effects, changes in crypto token valuations can be enormous. Of course, most cryptocurrencies have inherent value that cannot be dismissed lightly. Since the birth of Bitcoin in 2009, however, we have witnessed not one, but two crypto winters and bear markets.
Because of the significant volatility in the cryptocurrency market, crypto traders are more prone to capitulate. Unfortunately, crypto tokens lose value swiftly at times, and investors are skeptical that they will be able to wait out the collapse and sell at a profit. Capitulation occurs when a decision is made to sell an item at a loss, regardless of how much its value has plummeted.
For crypto traders, especially those who invest in Bitcoin, the last two years, 2020 and 2021, have been a rollercoaster of emotions. While the token’s price reached an all-time high in April 2021, it began to plummet only a few weeks later. Many investors decided to sell a portion or all of their Bitcoin holdings at a loss as a result of the market’s massive move and Bitcoin’s underperformance. As a result of the massive selloff of Bitcoin tokens, the price of one BTC has dropped even more. Unfortunately, when capitulation occurs on a larger scale, it might result in further price drops in the item being sold.
KEY TAKEAWAYS
- Capitulation occurs when a large number of investors succumb to panic and sell in a short amount of time, creating a dramatic decline in the price of a securities or a market amid strong trading volume.
- Capitulation indicates a price low for the short term and is usually followed by a relief rally.
- There is no guarantee that the apparent “capitulation” will not be followed by further precipitous reductions unless the price rises dramatically.
- Capitulation produces a lot of investor turnover, which allows for a rebound by replacing risk-averse sellers with risk-tolerant buyers, but it doesn’t guarantee that those purchasers won’t sell even lower later.
Understanding Capitulation
Capitulation is the same as giving up. Capitulation occurs in financial markets when a substantial enough proportion of investors give up hope of recouping recent losses at the same time, usually as the price slide accelerates.
Let’s say a stock you own lost 30%, but you were confident it would recover. Imagine it plummeted another 20%, but the fundamentals were undeniably sound. Maybe you went a bit crazy on the dip and bought a little more. Now imagine that the same company is down 15% intraday, and the daily disappointment has given way to the certainty that you acquired a loser with room to fall even farther. As a result, selling the stock would be a capitulation move.
iMportant : Investors can only be certain about capitulations after they’ve happened and the price has rebounded.
It’s worth noting that the stock had already dropped 15% in a single day, implying that others were feeling the same way. While misery enjoys company, a concession necessitates a frightened crowd.
The vendors were “wrong” or the purchasers were “right” if they capitulated. While a short-term resurgence is invariably followed by surrender, that doesn’t rule out the possibility of prices falling even further in the future if future reverses transform the new “strong hands” into sellers.
Repeated high-volume price drops and premature capitulation calls are common features of bear markets. The truth is that the disease can only be definitively diagnosed in hindsight, if the price rises again.
