Crypto Short Squeezes What They Mean & How They Work

what is a short squeeze in crypto

A short squeeze is still more of a technical pattern than a fundamental occurrence, though. Here, traders borrow funds from an exchange, open a short position, and pay exchanges after exiting their positions. However, this varies between exchanges since some charge a commission for every four hours the position is open. Most cryptocurrency exchanges that allow margin trading have features such as stop-loss, minimizing the loss incurred by short-sellers. Online resources like MarketBeat provide useful short-selling data such as the largest short interest positions, changes in such positions over time, and short interest ratio. Exchanges such as the New York Stock Exchange and the Nasdaq also publish short interest data for the exchanges as a whole.

  1. Below we will explore the many short indicators that can be used to prepare for a short squeeze effectively.
  2. Since the cryptocurrency markets have borrowed a lot of concepts from traditional finance and the stock market, you shouldn’t be surprised to come across terms like short selling or short squeezes.
  3. A rapid rise in the stock price is attractive, but it is not without risks.
  4. When there is excessively high short interest, the market can move against short positions, forcing short sellers to cover their positions.

Large players can easily manipulate an asset with limited market capitalization, causing a cascade effect to drive the price in either direction. However, in cases where the market doesn’t follow the trader’s prediction, and the asset instead rises in value, traders will rebuy in a frenzy to minimize their losses. In most cases, especially with cryptocurrencies, it’s much easier to short an asset using a derivative contract, and since some have an expiration date, traders are forced to act quickly. Short selling is standard practice and keeps both investors and companies on their toes. GameStop was recently reported as the most shorted company on the S&P 500, primarily due to the public sentiment that it wouldn’t survive the shift away from retail stores during the coronavirus. Enough investors started buying the stock late in 2020 and the share price began to rise noticeably late in 2020.

The combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented. A short squeeze can happen in essentially any financial market where a short position can be taken. At the same time, the lack of options to short a market can also lead to large price bubbles. After all, if there’s no good way to bet against an asset, it may keep going up for an extended period. If you wish to participate in a short squeeze, some tips for trading cryptocurrencies in a short position could be helpful. However, please be aware that they do not constitute investment advice and that your own research should back up any decision you might take.

Betting on a Short Squeeze

Short squeezes can be especially volatile in highly levered markets. When many traders and investors use high leverage, the price moves also tend to be sharper, since cascading liquidations can lead to a waterfall effect. According to some estimates, Tesla (TSLA) stock had been one of the most shorted stocks in history.

A positive news story, a product announcement, or an earnings beat that excites the interest of buyers can defeat a short position. Every buying transaction by a short seller sends the price higher, forcing another short seller to buy. The primary target of a short squeeze is represented by an open market with a high ratio of short to long traders.

The Relative Strength Index or RSI, is a momentum indicator that helps to measure overbought and oversold conditions. A short squeeze setup would occur for different reasons depending on the readings. For example, a short squeeze is more likely to happen when the RSI shows extreme oversold conditions. However, a short squeeze can also appear when trending assets are overbought and short sellers have stepped in too early and ultimately were used to help squeeze prices higher.

Short squeeze

A dead giveaway of a short squeeze if there are more short positions than long positions on the market. Not everyone is familiar with how trading works, so in today’s article, we’re going to explore trading strategies like short selling or shorting and discuss the crypto short squeeze phenomenon. Financial markets are in a constant state of buying and selling, in which supply and demand is established. However, many other intricate factors can influence price action in the short term and long term.

what is a short squeeze in crypto

Regardless of how sure an investor is about an asset’s potential to depreciate, a short position can quickly be wiped out by something as simple as a product announcement or an upbeat news story. While these shifts may be temporary, it can lead to severe losses and even complete liquidation if left unchecked. But if it’s not, short sellers can face runaway losses as the expiration date on their positions approaches. They generally opt to sell out immediately, even if it means taking a substantial loss.

Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs. A notable short squeeze occurred among traders and investors of GameStop Corp. (GME) during the months following the COVID-19 pandemic. The short interest had grown so dramatically that it amounted to more than 100% of the shares outstanding.

Short Squeeze In Crypto

Days to cover, also known as the short interest ratio, is calculated by taking a stock’s total number of shares sold short and dividing that number by the stock’s average daily trading volume. For example, if a stock has one million shares sold short and its average daily trading volume is 100,000 shares, then the days to cover would be 10 days. That is, it would take 10 days for short sellers to cover their entire short position based on the average daily volume of shares traded. In general, the higher a stock’s days-to-cover figure, the more susceptible it may be to a short squeeze. If days to cover for stock A and stock B are two days and 20 days, respectively, then stock B may be more vulnerable as a short squeeze target.

Other important short squeezes have happened all throughout cryptocurrency history. The entire 2017 bull rally in crypto was said to be a heavily shorted rally, as most people expected Bitcoin to correct starting at $5,000 per coin, when it climbed all the way to $20,000. With the volatility of cryptocurrency prices, a short squeeze cannot be avoided. Therefore, traders in a short position should continue monitoring the interest rate of their asset and predict whether or not they are about to enter into a squeeze.

How does a short squeeze happen in the crypto market?

However, what makes a short squeeze a particularly volatile event is the sudden rush to quickly cover short positions (via buy orders). This includes many stop-loss orders triggering at a significant price level, and many short sellers manually closing their positions at the same time. A short squeeze can seemingly happen suddenly with price rising parabolically.

How To Prepare For And Find A Short Squeeze About To Happen?

During the 2008 financial crisis, Porsche Automobile Holding SE (POAHY), already a major holder of Volkswagen AG (VWAGY) shares, increased its total stake in Volkswagen to about 75%. The state of Lower Saxony also owned more than 20% of the company, leaving few remaining shares available to trade at a time when the stock was being heavily shorted. Hedge funds and other short sellers were suddenly left in a tricky position as Porsche’s move meant that not all of them could cover their positions.