Bitcoin: the bear flag and characteristics of the crypto market capitulation

Bitcoin is consolidating for the third straight trading session after a two-day decline. Last week's attempt at growth failed and the price returned to the $15,600-$17,200 range.

Here we see that BTCUSD is halfway to the support of the limit. And it also seems to be drawing a bearish flag, which will technically ensure this fall into the support area of 15,600.

Remember that so far there have been no growth drivers for the crypto market. Capitulation is likely to continue, but it also brings its own opportunities.

Lawrence McDonald, a Lehman Brothers veteran, argues that Bitcoin probably destroyed "much more" wealth than it managed to create.

He believes that the major cryptocurrency can't really serve as a viable store of value due to "unbearable" drawdowns.

While cryptocurrency proponents always tend to point to Bitcoin's brilliant returns over the past 10 years, McDonald is convinced that no one has actually held these coins for such a long period of time.

That said, the cryptocurrency has fallen 75.72% from its all-time high that was achieved in November 2021.

Last month, McDonald tweeted that Bitcoin continues to be anything but an inflation hedge. BTC has consistently been marketed as a store of value by supporters of the largest cryptocurrency.

Nevertheless, it has been performing as a typical tech stock in 2022, losing much of its value due to the U.S. Federal Reserve's monetary tightening policy.

Earlier, banking giant Goldman Sachs predicted that gold would outperform Bitcoin, arguing that the precious metal was a much better store of value.

The bank argued that the value proposition of the largest cryptocurrency was based solely on speculative trading. It also pointed to the fact that BTC was trading with other risky assets.

The year is coming to an end and it is clear that last year's hopes that the decline would be just a short-term correction have not materialized.

Instead, a bearish trend and several periods of capitulation have begun. In finance, the term refers to a period of aggressive selling when the last of the bulls concede defeat to become bears themselves.

What is crypto market capitulation? Suppose a cryptocurrency falls 30% overnight. The investor is left with two options: they can continue to hold or sell to realize their losses.

If most investors decide to realize their losses, the price will plummet. This selling pressure could produce a price bottom as the bears eventually run out of coins to sell.

But while it is very difficult to predict and identify a capitulation, there are some recurring market signals that can help traders prepare for such an event.

A cryptocurrency market capitulation usually includes most of these conditions: rapid price crash, large trading volumes, oversold conditions, high volatility, a big drop in the number of large holders, and negative market fundamentals.

Cryptocurrencies, especially those with extremely low market caps and liquidity, will always experience high volatility during a capitulation. But crypto market capitulations are not always bad for investors. On the contrary, they bring a period of maximum profit opportunity as the price bottoms out.

Over the past eight years, we have seen several market capitulation events, accompanied by large selling volumes and price lows, such as the March 2020 market crash.

Experienced traders and investors tend to see a crypto market capitulation as a harbinger of a price bottom. As a result, they prefer to accumulate during a falling market, thereby absorbing pressure from sellers and setting the stage for a potential bullish reversal in the future.

In addition, a crypto market capitulation tends to eliminate short-term sellers and gradually shifts the momentum to entities with long-term growth prospects, since almost everyone who was going to sell has already done so.

This is usually reflected in a steady increase in the supply of bitcoins held by addresses for more than six months old, called "old coins."

These coins are less likely to be spent on any given day, Glassnode's research, noting:

Nevertheless, timing a market bottom during a capitulation is extremely difficult, as the process can take months, if not years, as in the case of Bitcoin in 2014-2016. This is where analysis of historical data and previous market bottoms can help.