The word "capitulation," is derived from the military, and it refers to giving up or surrendering. You might wonder about its significance in the context of finance — and by extension the cryptocurrency world. The phrase refers to a scenario in which traders or investors give up on long positions that are currently losing money and sell, out of concern that the price of the stock will continue to fall. Hence, the ultimate phase of panic selling is called capitulation, during which sellers will accept any price to relieve the agony of what seems like constant pressure to buy.

Significant price declines are usually followed by capitulation, and this can happen even when a large number of investors are still bullish. As the market declines faster, investors begin to sell their holdings because they can no longer bear to lose more money. This causes the price to drop precipitously. As a result of the high trading volume that accompanies the downturn, investors who lack conviction or "weak hands" are displaced by more risk-tolerant holders who may not have experienced losses in the past and were prepared to purchase at the end of a prolonged decline that was capped with a sharp drop.

For example, a trader owns a high-conviction stock that has lost 15% of its initial cost. This trader at this point can either hold onto the stock and hope that its price increases, or sell and incur a loss. As soon as the trader sells the stock, which is already down 15%, he or she has essentially "capitulated" on their position.

There are two types of capitulation; market capitulation and individual surrender, as seen in the aforementioned scenario. When most traders/investors liquidate their holdings, overwhelming panic selling occurs in the market. This is known as market capitulation. A few instances of these kinds of things are:

The 40% decline in the value of cryptocurrencies worldwide in May 2021 as a result of unfavorable press from China
The S&P 500 Index's 30% decline from February 2020 to March 2020 in response to the coronavirus outbreak.

Understanding the Concept of Capitulation

Capitulation does not mean that the buyers or sellers were "right" or "wrong." Although a small recovery is unavoidable following capitulation, this does not rule out further price drops if future reversals transform the new "strong hands" into sellers. Capitulations frequently indicate significant junctures in the underlying securities and financial instrument price activity. Candlestick charts are used by technical analysts to recognize patterns of capitulation. The hammer candle is one such pattern that indicates a trading session in which the price falls well below its opening level but then reverses to recoup most of the loss by the closure. When loud volume is present, it implies that the decrease has reached its peak.

Typically, capitulation happens following an extended period of declining stock prices. Fear, uncertainty, and doubt, or FUD, can be brought on by several factors, including a downward market inadequate financial performance, negative press about a firm or the market, or a bear market. Bear markets can exhibit frequent, large-volume price declines as well as hasty cries for surrender. In actuality, a definitive diagnosis of the ailment can only be made in retrospect if the price recovers.

Capitulation: Avoid or Embrace?

Although it can be advantageous depending on an investor's situation, capitulation is neither good nor bad. Long-position holders stand to gain when short sellers liquidate their holdings during a bullish capitulation. As other traders liquidate their holdings during a bearish capitulation, investors may have an opportunity to purchase shares at a discount.

By forcing speculators and weak players out of the market, capitulation can help the market stabilize and create space for new players. For seasoned investors, capitulation in the cryptocurrency space can present a rare opportunity to purchase assets that they think will appreciate over time. This tactic, dubbed "buying the dip," entails finding cheap assets and entering the market during downturns with the hope that prices will rise in the future.

Conclusion

Capitulation pushes investors to liquidate their holdings and accept their losses rather than watch their assets continue to decline. This could happen as a bubble bursts when inflated asset values plummet. Nonetheless, the asset can start to appreciate once more after giving in.

The likelihood of the market collapsing increases with its volatility and your level of confidence in it. Keep in mind that not every cryptocurrency capitulation results in a bull market, and price charts shouldn't deceive you.