Volatile markets such as cryptocurrency markets are prone to excesses on the upside and the downside. Investors are rarely concerned with the upside events, but the downside events receive tremendous attention. As we see this week with television pundits and social media commentators weighing in on where the bottom may be and attempting to identify the exact date of reversal. Many of these commentators are calling the events of May 2022 a capitulation, but is it?
Market capitulation is the notion that a market reaches such bearish excesses that there are no more sellers in the market and the market is likely to reverse direction quickly and drastically. Note that this is more than simply a local reversal bottom in the market, a capitulation signifies an inflection point in the market cycle as investors can no longer stomach the losses and sell out of their positions en masse. For better or worse, there have been numerous capitulation events in the history of the cryptocurrency market and Bitcoin as the cryptocurrency with the longest history is most instructive.
History of Capitulation Events
When attempting to spot capitulation events, we must look for more than a one day drop and seek context from the history of the asset class to inform our investment strategies. There have been three major capitulation events during the recent history of Bitcoin. How does the recent drop in May 2022 compare?
January 2015 is the least like the others because Bitcoin had not reached popular consciousness yet, so focus on December 2018, which was the capitulation ending the bear market of 2017-2018 and May 2022, which coincided with the broader COVID market crash.
These events all have a number of things in common:
- The capitulation event occurs near the 200-week moving average
- The drawdown from the all-time high is greater than 70%
- The one-week drawdown is greater than 20%
- The weekly volume is extremely high
How does that compare with May 2022?
Market pundits and social media commentators may continue to refer to the price action of May 2022 as a capitulation event, but it does not match up with the others historically. That does not mean that May 2022 will not be a reversal point where upward pressure could occur, only that it is not a capitulation in the long-term perspective.
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