What Is a Short Squeeze?
A short squeeze refers to a situation in the crypto market where the price of a cryptocurrency experiences a rapid and significant increase.
This sudden price rise forces traders who have taken short positions on the asset to repurchase it to limit their losses, resulting in further upward pressure on the price.
Short squeezes are challenging to predict and can lead to a sharp and volatile market movement.
Short Squeeze | Source: Investopedia
Short Selling
Short selling involves betting on the price of an asset to decline.
Short sellers borrow the asset, sell it at the current market price, and aim to buy it back at a lower price to return it to the lender.
If the price starts to rise instead, short sellers may face losses and be compelled to buy the asset to close their positions.
This buying activity from short sellers contributes to the upward price momentum during a short squeeze.
What Triggers a Short Squeeze?
A short squeeze is triggered when many short sellers buy the asset to cover their positions.
This increased buying activity creates a surge in demand that surpasses the available supply, leading to a rapid price increase.
The short squeeze conditions are typically driven by a combination of factors, including a significant rise in price, high short interest (the number of outstanding short positions), and market sentiment.
Monitoring short interest is crucial in assessing the potential for a short squeeze.
When there is a high level of short interest, it indicates that many traders have bet against the asset, creating the potential for a squeeze if the price rises.
Short traders can be forced to buy the asset quickly, further increasing the price and exacerbating the squeeze.
What Is a Long Squeeze?
A long squeeze is the opposite of a short squeeze and occurs when there is increased selling pressure on a cryptocurrency due to market conditions.
It results in a rapid decline in the price as the supply of the asset exceeds demand.
Long squeezes are less common than short squeezes but can still lead to significant price drops.
Before making any trading decisions, it is essential to thoroughly analyze the market dynamics and understand the reasons behind the bullish and bearish prevailing sentiment.