The process begins with the trader borrowing shares of a stock from a broker. These shares are typically borrowed from the broker’s own inventory or from other clients’ accounts. Once the shares are borrowed, the trader sells them in the open market at the current market price. This is because while a short squeeze forces short-sellers to liquidate, a long squeeze must induce enough panic to get long holders to start dumping.
Aggressively growing stocks are generally more susceptible to long squeezes, especially if the volume is very high. Focusing on investing in value is the best way to handle these squeezes. Undervalued assets will usually recover unless there was a more intrinsic reason for the sell-off.
As such, a short squeeze is typically accompanied by an equivalent spike in trading volume. That being said, short squeezes can take place in any kind of financial market, even for more liquid investments with large market capitalizations. While Bitcoin doesn’t have the best liquidity, especially compared to traditional stocks and shares, BTC’s recent rise to around $40,000 has pushed Bitcoin’s market capitalization above $1 trillion. With the rise of automated trading systems, bots can quickly jump into low liquidity markets and exploit both long and short squeezes to profit. Large players can easily manipulate an asset with limited market capitalization, causing a cascade effect to drive the price in either direction.
Before making any trade, study the crypto market and why traders are betting against it. This happens when there is increased pressure to sell a crypto asset because of the market conditions. This often results in a quick price collapse since more supply exceeds demand. Despite this, it is important to be aware of their existence when trading in the crypto markets. 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.
In a similar vein, a long squeeze occurs when there is a sudden drop in an asset’s value, encouraging greater selling pressure and squeezing longs out of the market to protect their investments. Shorting an asset is betting on an asset’s depreciation, and it involves borrowing the asset and selling it, only to rebuy at a lower price point to give the asset back. 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. If that happens, it might not be a good idea to try to recover those losses. Bullish investors view a high short interest as an opportunity to make money from the abrupt momentum shift. During a squeeze, short-sellers decrease supply by scrambling to replace their borrowed assets.
Investors who short a stock are betting the stock will go down in value. To capitalize on that, they borrow shares from a broker, then sell them at the current price. When the stock price falls, they buy the shares at the lower price, return them to the broker and pocket the difference. Short squeezes happen when a heavily shorted asset climbs in price.
Introduction to Short Squeezes
If you’re not familiar with shorting and how it works, check out What is Shorting In the Financial Markets?. We’d all love to have a secret superpower that helps us spot the next digital assets or blockchain projects with massive growth potential, representing a secure investment. Let’s learn how to spot the next crypto unicorn worth your investment. Generally speaking, short squeezes are brief events that last only a few hours or days at most. Fortunately, there are several ways to proactively defend yourself against short squeezes. Generally, when a short seller opens their position, they borrow and sell the number of tokens they want to short.
The opposite of a short squeeze is a long squeeze – though it’s less common. A long squeeze is a similar effect that happens when longs get trapped by cascading selling pressure, leading to a sharp downward price spike. You can always stay in the loop by keeping track of the short interest ratio (shares short divided by average daily trading volume). A high short-interest ratio means there’s an increased risk for a short squeeze. A dead giveaway of a short squeeze if there are more short positions than long positions on the market.
Short Squeeze: What is it, How to predict a Bitcoin Short Squeeze?
- A short squeeze can happen in essentially any financial market where a short position can be taken.
- Make sure you understand the implications of a short squeeze before you enter a short position.
- But for others, they can be financially ruinous, since they can throw a spanner into the works of even the most prophetic short strategies.
- These instances highlight the crypto market’s volatility, often swayed by social media and market sentiment, underscoring the need for traders to stay informed and flexible.
Since short squeezes tend to happen more often with smaller market cap assets, a supply bottleneck can quickly arise out of such situations. During a sudden market movement, short-sellers will rebuy into an asset en masse, creating a momentum that pushes itself and the price ever higher. bond market mayhem lives on in these 10 charts This squeezes the short-sellers from the market, and usually for a loss. After dropping to around 6% of its all-time high value, GameStop’s stock began to rise in a short squeeze from September 2020, growing by over 10x over the next few months.
These instances highlight the crypto market’s volatility, often swayed by social media and market sentiment, underscoring the need for traders to stay informed and flexible. 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 brokerage account definition all, if there’s no good way to bet against an asset, it may keep going up for an extended period. Before you take a short position, be sure you are aware of the consequences of short squeezes. For example, the electric vehicles company Tesla, whose stock is called TSLA, has the most shares sold short in history.
Unfortunately, instead of the price falling, it increases to $12,000. The time to return the borrowed funds is due and Bitcoin’s price is now at $12,500, with no sign of dropping. This means that you’re in a squeeze; you either buy back at $12,500 or wait to buy later at an even higher price. Shorting is selling a cryptocurrency intending to buy again when the price falls.
Short squeeze examples
Thankfully, there is a large number of preventative measures you can take to protect yourself from a short squeeze. Here’s what you need to know about this relatively common financial phenomenon. The purpose of this website is solely to display information regarding the products and services available on the Crypto.com App.
The Bitcoin derivatives market uses high-leverage positions, and these can be trapped or liquidated with relatively small price moves. As such, short and long squeezes happen frequently in the Bitcoin markets. If you’d like to avoid getting liquidated or trapped in such moves, carefully consider the amount of leverage you’re using. Since cryptocurrency prices are highly volatile, short squeezes cannot be avoided. Considering that an equivalent spike in trading volume usually accompanies a short squeeze, panicked author mary davis | currency-trading.org short sellers create a dramatic price rise. Although this measurement is borrowed from the stock market, it’s incredibly significant in the cryptocurrency market.
Find out which online crypto service or hardware suits the best for you and make the choice yourself. When Porsche announced a takeover of Volkswagen in October 2008, short-sellers scrambled and prices soared. Volkswagen briefly became the most valuable company in the world before prices declined. Learn more about shorting Bitcoin and other crypto assets in this in-depth article. In June last year, Bitcoin surprised the market jumping from under $9,500 to a 4-month high of nearly $10,400 in just one day. It sparked the highest number of liquidations on BitMEX since October 2019 – worth a staggering $133 million.
Over $430 million worth of Bitcoin shorts were liquidated across all platforms in less than 24 hours, with most of them occurring in the hour after Bitcoin crossed $10,000. In this article, we’ll discuss what a short squeeze is, how you can prepare for it, and even profit off it in a long position. Naturally, if you’d like to understand what a short squeeze is, you’ll need to understand what shorting is first.