Cryptocurrency: What is capitulation and what does it mean for bitcoin investors?

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The crypto winter could be about to go into deep freeze for Bitcoin if headwinds that are blowing finally break the will of bull investors who have been propping up its value. Having held between $20,000 to $25,000 through the summer, it dropped out of that range on Tuesday.

One of the primary factors affecting Bitcoin, as well as other cryptocurrencies and other financial assets, has been the aggressive monetary tightening by the US Federal Reserve to tame inflation not seen in four decades. As investors have sought out more secure investments such as bonds and the US dollar, digital coins, stock markets and other global currencies have tumbled.

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What is capitulation?

As the name suggests, a capitulation by Bitcoin investors would mean them calling it quits, cutting their losses and running. And the losses so far this year have been daunting. Bitcoin has fallen by around 60 percent since the beginning of the year, far below its peak around $68,000 reached in November 2021.

But after a dramatic drop in May, that sparked the spectacular collapse of two major coins, followed by another a month later, the original cryptocurrency has hovered above $20,000 since mid-July.

“Bitcoin is continuing to show resilience around $20,000,” Craig Erlam, an analyst at broker Oanda told Barron’s. “But that’s really being put to the test as risk aversion sweeps through the markets once more.”

“Considering the outlook for risk appetite in the near term, it’s not looking good,” Erlam added. “A significant break at this point could be really damaging.” In his view around $17,500 would be key level below which those Bitcoin investors that are riding out the storm may finally capitulate.

A “massive capitulation” on the horizon

Advocates of cryptocurrency see them as assets that should trade like a commodity such as gold and not be correlated to the stock markets. However, the highly volatile digital currencies had plunged in sync with the traditional stock markets. Although recently Bitcoin broke that pattern avoiding the selloffs the stock market has experienced in recent weeks.

Naeem Aslam, an analyst at broker AveTrade, thinks that is about to change. “We believe that this [Bitcoin] capitulation can be any day now,” he told Barron’s. “Bitcoin’s daily range has narrowed massively, and this is giving us an indication that a massive capitulation is coming.” Furthermore, he points to the extended length of time that the digital coin, which has the largest market cap, has been in that narrow range.

Aslam feels that the “bulls are holding on to their ground very well” resisting pressure to sell in order to keep the price of crypto higher. He points to Bitcoin decoupling from the woes of the stock market and bouyancy despite the continued rise of the US dollar against other global currencies. The latter should be creating strong headwinds for digital assets, enticing investors out of crypto.

However, if investors decide to toss in the towel the rout could be spectacular and those that are left could take a real battering. “The sell-off could be so intense that it could easily push the prices towards the $12,000 price mark,” Aslam said.