What is realized loss, and how does it affect traders?
Traders record a realized loss whenever an asset is being sold on the market for a price below the cost or book value. Simply put, a trader or an investor suffers a realized loss whenever he sells an asset for a price lower than his or her initial purchase level.
It is important to separate realized and unrealized losses, as volatile assets like Bitcoin recover quickly from a massive loss and turn positions in loss to profit in the course of a day.
But whenever the market reports a massive spike in realized losses as we have seem today, we should expect to see a decrease in selling pressure, especially after an asset loses almost half of its value in such a short period. Alternatively, traders refer to situations like this as "capitulation."
Largest realized loss since summer 2021
The last time the market saw such a high level of realized losses was the summer of 2021, when Bitcoin showed similar behavior on the market by losing around 45% of its value in less than a month. After the cryptocurrency market "celebrated" the largest realized loss in history, we saw a gradual recovery of Bitcoin and a rally to $69,000.
Capitulation is not a panacea and does not necessarily mean that we will see the bounce of the market since the market lacks the primary fuel for a retrace, which is buying power.