The short squeeze that generated a new peak for the Bitcoin price recently, is changing investors’ outlook on cryptocurrencies. The event is sparking a bullish market trend through to 2024, according to analysts.
Since May 2021, the numerous liquidations of short-selling positions have led to July’s short squeeze.
Knowing that short sellers are betting on a drop in price, the purchase they make by closing their positions has increased the asset’s price relative to transaction volume.
Our article looks at this phenomenon, known as short squeeze. We’ll define short squeeze according to the market, and try to understand and anticipate this recurring phenomenon in the crypto world.
Short squeeze: a phenomenon of sudden rise
If we’re looking for a short definition for short squeeze, it’s an almost unexpected event that forces short sellers to close their positions hastily, causing the price of the asset in question to rise.
The phenomenon can be triggered by a margin call when investors attempt to cover their position.
To understand short squeeze, you need to understand the short-selling process. Short sellers bet on a future fall in the price of an asset on the stock market.
The principle is to sell an asset at its current price and bet on the next fall in order to buy it back. Traders pocket the capital gain between the fall and the price of the asset on sale.
Short squeeze is the erroneous anticipation of VAD or short selling, as the price of the asset suddenly rises due to the forced liquidation of positions by traders.
The phenomenon is often exceptional, like the price rally Bitcoin recently experienced.
Can short squeezes be anticipated?
Even if a short squeeze is a risky market action, the latest event in the Bitcoin price is proof that the phenomenon can be anticipated.
Some stock market analysts predicted a rise in the price of the famous cryptocurrency as early as last May.
Indeed, financing rates that remained negative, causing a squeeze in supply, prompted a temporary rise in the price of Bitcoin.
Since the short squeeze phenomenon is particularly volatile, you can take advantage of this sudden rise in price.
All you have to do to profit from a short squeeze is plan your action in the direction of the rising price. Indeed, many trades are planned to cover short positions in return. In this case, it’s wiser to bet on stop losses and short position exits when they reach a critical threshold.
Anticipating a short squeeze can also be done by scrutinizing the asset’s short/long ratio, bearing in mind that the sudden rise in price is preceded by more short options than long.
So, to be a more informed trader, it’s wiser to place long or buy orders to take advantage of a short squeeze.
