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A study of capitulation

A study of capitulation


Past performance is not an indication of future performance. On the other hand, those who do not learn from the mistakes of the past are doomed to repeat them. Make of that what you will, but we wanted to take a look at previous capitulation events in the bitcoin market to get some sense of what we might be in for…

This does not constitute financial advice. Trading is risky and trading bitcoin is very risky. Loss of capital, reputation, self-confidence and spouse are likely.

After the stellar rise to $20k a year ago, bitcoin has spent all of 2018 in correction mode. Just as the question in 2017 was ‘Where will this top out?’ the burning question today is ‘Where will this end?!’

You can read plenty of technical analysis that points to support around $3,000, $2,500 and potentially a lot lower. What we’re interested in here is that last, convincing move the market makes to the downside at the end of the bear cycle, shaking out the last of the weak hands in a panic of selling and immediate frenzy of buying when the ultimate low is established: Capitulation.

Put simply, the market heads lower, and lower… and then it all-out dives. Traders are taken by surprise, they exit their positions in utter terror, and then – just as quickly – sentiment turns. Fear becomes greed. The movement reverses, with the chart painting a characteristic ‘V’ shape. The lowest prices never last long, perhaps hours or even less, but those who put their buy orders in the right place profit handsomely. So: where will it start, and how deep will that capitulation dive be?

Where is hard to say, because the price could grind much lower before that final move. Looking at 2015, we did see brief stability and a bounce from around $260 – the top of the previous bubble of April 2013 – before the final drop. That was a 40% move to the downside over 2 days, bottoming at $155, before rapidly reverting and stabilising at prices 30% above that.

For comparison – and it should be made clear this is a meaningless comparison without knowing where the capitulation move would start – if it happened at $3,500 then we’d see the price touch $2,100 before recovering to $2,700.

Capitulation is not so easy to pinpoint for the previous bubble of April 2013. ‘Capitulation’ on that occasion followed directly from the bubble bursting: from the high to the low in that cycle took less than three days. Between 10 and 12 April 2013, BTC topped at $260 and plummeted to below $50, with prices above $100 quickly reached after that. A period between June and August 2013 saw bitcoin trade under $100 for the last time.

On that occasion, the market did revert to its mean: before the bubble, BTC had been steadily rising, and enjoyed a period of stability just below $50 prior to the parabolic rise. That market was, of course, very different, and doesn’t compare easily to today’s market, with a diversity of exchanges and dramatically higher liquidity and volumes of money.

What would a good strategy be this time? That depends on your risk appetite. But we can see a situation where that final fall would line up with support around the $2,000 level. A candle wick might drop a lot lower. Remember, the lowest prices will last only for a very short time, so you’re trying to catch a falling knife. A safer strategy would be to place several orders on the way down. It’s a more mature and liquid market now, so there will likely be more buyers to soak up the panic sells – the same 40% drop is less likely. Shot in the dark? 25-30% final drop. Should that start at $3,000, we’d briefly see around $2k prices. A better approach might be to start perhaps 10% below the lowest price so far, down to 40$, just in case. Good luck!

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