Crypto Short Squeezes What They Mean & How They Work

what is a short squeeze in crypto

A successful short-seller would profit from the difference when the cryptocurrency is later bought back. Short sellers don’t always manually cover their positions to contribute to a short squeeze. More often than not, the move is strong enough to trigger short-side stop loss orders, forcing traders out of their positions. That being said, short squeezes can take place in any kind of financial market, even for more liquid investments with large market capitalizations. A short squeeze forces short-sellers to buy back in, pushes the price higher, and squeezes out more shorts. A short squeeze can also occur when there is a disruption to the supply or excess demand for an asset due to short-sellers liquidating their positions.

Keep in mind that if a large number of shorts are opened against a certain stock or cryptocurrency, it doesn’t necessarily mean it is on the brink of a short squeeze. The risk is quite high here when you are betting in favor of the price when the market sentiment lexatrade review is against it. An asset on which the majority of the traders are bearish is likely to move in a downtrend in most cases. Every short seller that closes their position will automatically turn into a buyer, thus fueling the buying pressure even more.

Therefore, trading small caps when shorting crypto is recommended to minimize losses. Experienced traders open short positions when they believe a price drop is about to happen. With a rapid uptrend and a massive volume of buy orders, more traders will ride the mooning crypto.

  1. But an extremely high reading could be a sign of a coming short squeeze, which could force the price higher.
  2. It only got a retest years later, during the coronavirus pandemic (also known as “Black Thursday”).
  3. Financial markets are in a constant state of buying and selling, in which supply and demand is established.

It’s a very common way to manage downside risk, hedge existing holdings, or simply express a bearish outlook on the market. It isn’t uncommon for short traders to get caught up in a short squeeze. Few are aware of the changing situation and manage to exit their position before the market starts to move against them. Looking back at historical data, an overcrowded bitcoin short interest position resulted in a short squeeze that occurred on 10 November 2022, with BTC closing the day about 10% higher. Unsurprisingly, bitcoin short interest has surged since news of FTX’s insolvency broke in early November.

What Happens in a Short Squeeze?

The number of shorts on Monero, arguably the most prominent privacy coin in the blockchain space, has been rising since mid-2020. It currently has over 3x more shorts than longs, according to Datamish, most of them unhedged. Short squeezes are high-risk/high-reward moves that typically get increasingly risky and less potentially profitable the longer they thinkmarkets review go on. Overcrowded short market and a sudden upbeat development that boosts the price of an asset may cause a short squeeze. Generally speaking, short squeezes are brief events that last only a few hours or days at most. Register now for a free account or try a monthly subscription to minimize your losses and increase your profits in crypto trading.

what is a short squeeze in crypto

This strategy will include accumulating a position before the squeeze happens and using the quick spike to sell at a higher price. Whether it’s a stock or a cryptocurrency, short traders bet against their price when they believe it will decline soon. Their speculation is mostly based on technical analysis or fundamentals of that project. In this article, we will discuss the widely popular term Short Squeeze and how this condition affects traders in the crypto market. We will also talk about what causes short squeezes to occur, how traders can benefit from it and whether you can spot one in advance or not.

How to calculate the short-interest ratio?

It starts a chain reaction that causes panic among short sellers, and most end up closing their positions. The reaction not only turns short sellers into buyers but also attracts other buyers who have been waiting on the sidelines for the price to go up. When there is a significant number of shorts position opened in the market and the price rises dramatically, it can create a panic buying situation. The sudden increase in the price will push the short sellers to cut their losses and buy the asset at the current market price. When short traders try to profit from a short position, they risk losing money if they are forced to buy back their tokens at a price higher than what it initially was.

The coin could be extensively shorted due to fundamental causes, including a poor market outlook or a cyber attack. The price quickly broke through expectations, and the territory didn’t even experience a retest for quite some time. It wasn’t until the global pandemic (or “Black Thursday”) that the price range was tested again.

A short squeeze can benefit traders who still believe in the asset and are betting in its favor. Short squeezes happen when there is a lot of doubt about the asset, and a good number of short positions are opened against it. For a long trader to bet in favor of the price at the time is always risky. If a trader can see a short squeeze coming, they can benefit heavily from it. The short sellers bet so heavily on its failure that by the end of 2019, it was the most shorted stock in the stock market. The company kept flourishing, and eventually, at the beginning of 2020, the pressure got to the traders.

what is a short squeeze in crypto

When short sellers acquire XYZ crypto to close their positions later, they become purchasers. Since there are both new buyers and short sellers (who become purchasers in the second phase), the price of XYZ crypto should continue to rise. This will enhance XYZ’s price and make short sellers worried that the crypto is growing instead of falling. This will cause more short sellers to purchase back XYZ crypto to limit their loss. Because of XYZ’s rising value, regular purchasers will continue buying crypto.

Short sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall. If they’re right, they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position. If they’re wrong, they’re forced to buy at a higher price and pay the difference between the price they set and its sale price. This usually entails low sentiment around a company, a perceived high stock price, and a large number of short positions. If, say, some unexpected positive news comes out, all those short positions are forced to buy, leading to an increase in the price of the stock.

What Triggers a Short Squeeze?

The situation worsens every time the buying pressure gets stronger, as new investors come in and more short orders are paid off. Aptly coined as the “Short Squeeze,” it literally squeezes many traders to accept their losses. The short-interest ratio can be used to track market sentiment by observing when the value is outside its usual range. It is calculated by dividing the total number of shorts by the average daily volume for that asset.

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Why do Short Sellers Close Their Position?

Day traders are able to spot early signs of a short squeeze by weighing in on the overall market pulse, fundamental indicators, and contrarian signals. With such knowledge, traders can close a position earlier before suffering losses. In some cases, reading the signs can also help to further take advantage of a real shorting opportunity by re-entering the position. Speculators and investors who disagree with the current fundamental factors may decide to purchase the asset that many others are shorting in order to profit from a bear squeeze. A sudden increase in the value of cryptocurrencies may seem appealing, but it also comes with some serious dangers.

Assume that because of the huge short interest, Medicom shares had declined from $15 a few months ago to $5. Then, the news comes out that Medicom’s drug works better than expected. Medicom’s shares jump to $9, as speculators buy the stock and short sellers scramble to fusion markets review cover their short positions. A short position allows a trader to sell an asset that they don’t own with the intention of buying it back at lower prices. Generally, a short trader enters into a position when they think the price will keep dropping in the near future.

The top crypto slumped to $15,588 on 9 November 2022, its lowest since late 2020, historical BTC price chart showed. No one can really predict when they will happen and how far they will go. So it is better to tread carefully when you are dealing with a short squeeze. When a sudden positive development comes to the surface related to the asset, it could really shift the momentum. For example, if it is a crypto project, some news about a partnership or a new update could shift the trend dramatically.

Crypto Short Squeezes What They Mean & How They Work

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