Glossary

Short Squeeze

Easy

A short squeeze is an unusual market condition that causes the price of a coin to rise quickly, encouraging traders (who are betting against the price of the token) to buy it to avoid losses.

What Is a Short Squeeze?

A short squeeze in the crypto market coincides with a sharp rise in the price of a crypto coin. Those holding short positions on the coin are forced to begin buying the asset (as a result of a FOMO). Albeit a common occurrence in the financial markets, they are always challenging to predict.
A short seller follows the bear market price trend and bets on the coin price to fall. They can use multiple methods and tools to ensure their strategy is successful. However, if prices start rising, their short positions lead to losses. If their losses rise too high, short sellers find it a better option to close their position. This often happens in margin and futures trading. Traders can also manually close the position, although building an automatic stop-loss trigger is a preferred strategy.

What Triggers a Short Squeeze?

When numerous short sellers close their short positions in a short span, which means they keep buying the coin, a spike in price is observed. It triggers the short squeeze conditions. If all shorters initiate buying, demand outweighs supply, which causes the crypto coin’s prices to rise. A significant rise in trading volumes that lasts only a short time often follows a short squeeze.

An important factor to look at is the short interest at any given time. The main reason people short the market is to benefit from the high-interest rate paid out if their predictions are correct. Consequently, there is always an opportunity for short squeeze conditions, especially in the volatile crypto markets.

What Is a Long Squeeze?

The flip side of the short squeeze is the long squeeze. This happens when there is increased pressure to sell a crypto asset because of the market conditions. This often results in a quick price collapse since more supply exceeds demand. However, long squeezes are less common. Despite this, it is important to be aware of their existence when trading in the crypto markets.

Some advanced traders will look out for conditions that could create short squeeze opportunities. They aim for longing and profit from the increases in prices. This strategy entails buying a crypto asset in large quantities just before the squeeze and selling the assets immediately after the price starts spiking.

However, one must exercise caution. Heavily shorted crypto markets are that way for a good reason. Valid reasons lead numerous investors to bet on the crypto price going down. One should be wary of taking any position on heavily shorted tokens. Before making any trade, study the crypto market and why traders are betting against it.