Short squeeze
A short squeeze is a rapid price increase that gains momentum as short sellers are forced to buy. Short sellers are traders who expect the price to fall.
What is a short squeeze?
Someone with a short position expects the price of a cryptocurrency to fall. If the price rises instead, that trader takes a loss. To close the position, the trader has to buy.
When many short sellers buy at about the same time, it creates additional buying pressure. This can push the price even higher. That puts more short sellers under pressure to buy, too. This can create a self-reinforcing cycle.
Not every rapid price increase is a short squeeze. It only counts as one when the closing or forced closing of short positions clearly intensifies the price increase.
An example of a short squeeze
Many traders have short positions on a cryptocurrency. The price rises unexpectedly. Some traders quickly buy to limit their losses.
Those extra buy orders push the price even higher. Traders who are still short then face greater losses and may also start buying. This shows how a short squeeze can happen.
Why are short squeezes important in crypto?
Short squeezes are especially common with crypto futures and perpetual futures. These are contracts that let traders trade on the price of crypto. Many traders use leverage, which means they trade with a larger position than the amount they put in.
As a result, a crypto exchange may automatically close a position if too little collateral remains. This is called liquidation. Many liquidations in quick succession can create extra buying pressure and rapidly push the price up.
That’s why news about a sharp price increase may mention short positions, liquidations, and open interest. This doesn’t automatically mean the price will stay high or keep rising. Once the buying pressure from short sellers fades, the price can also fall quickly.
