What is the short squeeze? Understanding and anticipating this recurring phenomenon in the crypto world

Temps de lecture : 2 minutes

The short squeeze that spawned a new peak for the price of Bitcoin recently is changing investors’ outlook on cryptocurrencies. The event is sparking a bullish market trend through 2024, according to analysts.

Since May 2021, numerous short-sale position liquidations have led to the July short squeeze.
Knowing that short sellers are betting on a price decline, the buying they do by closing their positions has increased the price of the asset relative to trading volume.

Our article wants to take stock of this phenomenon, the short squeeze. We will define the short squeeze according to the market, and try to understand and anticipate this recurring phenomenon of the crypto world.

The short squeeze, a sudden rise phenomenon

If we look for a short definition for the short squeeze:

it is an almost unexpected event that forces short sellers to close their positions hastily, causing the price of the asset in play to rise.

The phenomenon can be caused by a margin call when investors attempt to cover their position.

To understand the short squeeze, one must understand the process of short selling. Short sellers bet on a future decline in the price of an asset in the stock market.

The idea is to sell an asset at its current price and bet on the next drop to buy it back. Thus, traders pocket the capital gain between the decline and the price of the asset on sale.

Short squeeze is the false anticipation of short selling, as the price of the asset experiences a sudden rise due to a forced liquidation of positions with traders.

The phenomenon is often exceptional, such as the price rebound that Bitcoin has recently experienced.

Can we anticipate the short squeeze phenomenon?

Although a short squeeze is a risky market action, the latest event on the price of Bitcoin is proof that the phenomenon can be anticipated.

Some stock market analysts predicted the rise in the price of the famous cryptocurrency as early as last May.

Indeed, the funding rates that have remained negative, causing a squeeze in supply, have prompted a temporary rise in the price of Bitcoin.

Since the short squeeze phenomenon is particularly volatile, you can take advantage of this sudden price increase.

All you have to do is plan your action in the direction of the rising price to take advantage of a short squeeze. Indeed, many trades are planned to cover short positions in return. In this case, it is safer to bet on stop losses and short exits when they are on a critical threshold.

Anticipating a short squeeze can also be done by looking at the short to long ratio of the asset knowing that the sudden rise in price is preceded by more short options than long.


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