Capitulation

What Is Capitulation?

In finance, capitulation refers to a sudden increase in selling pressure in a sinking market or asset that signals a widespread surrender by investors. Because individuals who did not sell throughout a crisis are reluctant to do so soon after, the subsequent steep drop in market prices can signal the end of a collapse. 

Capitulation is defined as the point at which investors lose hope, accept the loss and give up earlier profits. Capitulation often occurs after severe price declines, even when many investors stay bullish. Then, as the slump worsens, the selling by investors unwilling to bear further losses snowballs, resulting in a steep drop in price. 

Diving Deep Into the Concept of Capitulation

Initially, militaries used the term capitulation to refer to the act of abandoning a region or force when discussing terms with an opposing force. If used in an economic context, the term indicates the point at which investors submit to market forces. 

Rather than hoarding in anticipation of a market recovery or bounce, investors choose to sell their holdings at the present market rate (market orders are usually used during periods of panic selling).

When the market exhibits an unusually high level of sell orders in a short time, as well as a rapid price decrease, it may suggest that capitulation is occurring. Although not always easy to predict, capitulation is easily identified because it puts an extreme drop in market prices - with drastic and quick movements. 

Example of Capitulation

Capitulations are common in cryptocurrency markets and generally faster and more robust than in traditional markets. An excellent example was Bitcoin's steep price decline in January 2015. A prolonged bear market in 2014 resulted in a period of extreme FUD at the start of 2015. 

Fearing even higher losses, investors started to panic-sell their stocks. The capitulation occurred on January 15th, 2015, when a massive increase in sell orders over just a short period caused a 38 percent drop in Bitcoin's price in two days. 

In this case, the bottom was achieved at around $167, representing an 85.5 percent drop from the 2013 high (about $1153), and the conclusion of capitulation signaled the start of a bull market. The next day saw a jump that was just as significant as the previous day's dip, with a 38 percent gain in one day.