Capitulation is the wrong word for the bitcoin market
The word capitulation has been used a lot in the context of the bitcoin market in recent days -- understandably, as the price collapsed by more than a third in the space of a week, briefly to below $3,600 on Sunday.
It is of course impossible to know what everyone in a market is up to (particularly in one where manipulation appears to be rife) but we suspect there is a nuance to what's going which some are missing. Capitulation tends to be thought of as investor surrender. It's the point when a holder, or hodler, decides they'll never make back their losses and abandons the market.
There'll be some of that, sure. A look at the charts of the falling cryptocurrencies points to another, slightly different aspect of the market, however: a scarcity of buyers.
Obviously we're going to amble in the direction of technical analysis here, which we have mocked almost as ruthlessly as bitcoin and its imitators. Reading chart scribbles like they are tea leaves is going too far, but there can be some useful information in price movements. Take for instance this so-called candlestick chart of each day's bitcoin price over the last two months
The vertical line -- or wick -- of each candlestick shows the full range of prices at which bitcoin traded each day. The thick part -- the wax -- shows the move from opening price to closing price. A green candle is an up-day, a red one a down-day.
What we're looking at above is the Bitstamp exchange price (other exchanges are available). Focus on the big red candles -- they are large, much more so than the green ones which sometimes follow. To some, this suggests a market struggling to find a steady price level, and an absence of buyers coming in.
The psychology starts to become fascinating here, because the question is what price is low enough to tempt people back. Consider stories about how bitcoin suffered bigger percentage point declines in the past, only to recover -- those might not be that relevant, or helpful, in the short term.
If you were told that bitcoin previously crashed from almost $1,200 in late 2013, to $150 just over a year later, do you hear that it makes sense to buy in after the price has crashed 85 per cent -- which from the most recent peak would be about $3,000 -- or when it gets towards $150?
Another aspect is the pool of potential buyers. One of the best ways to understand the crypto phenomenon is as a giant pyramid scheme. The scheme makes (some) people rich so long as it is expanding, pulling in new recruits. Once the recruits dry up, the pyramid collapses as losses drive people away. In the old days they might have been left with cupboards full of soap powder they can't sell; in the 21st century it's an encrypted USB stick filled with 1s and 0s arranged in pretty (and once valuable) patterns.
Because bitcoin went mainstream last year -- as a means of speculation rather than a currency for transactions -- the risk is that it has tapped out an enourmous pool of now disillusioned recruits.
The indoctrination which was part of that process makes it hard to let go, however. Consider one of the most notorious examples of financial pyramid schemes: those which crashed the economy of Albania in 1997.
After the collapse of the Soviet Union, the country experienced a mix of pure pyramid schemes, and also smuggling businesses which became pyramids. Here's Christopher Jarvis, in a piece for the IMF:
Some of the largest of the companies—in particular VEFA, Gjallica, and Kamberi—had substantial real investments. They were also widely believed to be engaged in criminal activities—including violating United Nations sanctions by smuggling goods into the former Yugoslavia—that were thought to be the source of the high returns they paid.
There is perhaps a parallel with the value bitcoin is/was said to derive from its use in criminal transactions on the darker parts of the internet.
An end to UN sanctions on the Federal Republic of Yugoslavia, at the end of 1995, ruined the smuggling trade. Yet monthly interest rates paid by the schemes started to go up, as competition for capital intensified and most of the population was drawn in. Here's Jarvis:
Albanians sold their houses to invest in the schemes; farmers sold their livestock. The mood is vividly captured by a resident who said that, in the fall of 1996, Tirana smelled and sounded like a slaughterhouse, as farmers drove their animals to market to invest the proceeds in the pyramid schemes.
The fallout was vicious. By March 1997 the government had lost control of large parts of the country, 2,000 people had been killed in unconstrained rioting, and parts of the economy had come to a halt.
Note, however, the mentality of some, and difficulties faced by the incoming government, according to Jarvis. It made quick progress in restoring order and shoring up the economy, but:
Winding up the pyramid schemes proved to be more difficult. The government encountered resistance from both the operators and the outgoing parliamentarians, many of whom were reported to have invested in the schemes.
What makes the downward path of the crypto universe hard to predict is the large number of true believers and stakehodlers. For instance:
The real question doesn't so much concern fundamentals as it does fundamentalists. Are there enough of them to recruit a new population of buyers?