A short squeeze has great impact on any market's price. Yet, in cryptocurrency, the short squeeze can have a larger impact. What is a short squeeze? And more particularly, what is a short squeeze in crypto? This article will discuss exactly those topics, furthermore, we will dive deeper into how to analyse markets to spot a short-squeeze early on.

What is a short trade?

To understand a short-squeeze, first you have to understand how a short works and what a short is. A short, is when stock/crypto traders borrow a certain asset, and sell it in hopes that the price will go down. If the price does go down, then the trader can re-purchase the asset, pay back their loan, and net a profit on the trade. But what happens if the price of the asset goes up? The trader then has to re-purchase the asset at a higher price (to repay their loan), thus loosing money on the trade.

What is a short-squeeze in crypto?

A short squeeze occurs when there is an exorbitant amount of short trades, with a rising price. What happens, is that all the short traders, have to re-purchase the asset at a higher price to repay their loans.

A short squeeze typically makes the price increase in a very volatile manner. This occurs due to numerous reasons. Primarily, the first short positions are forced to get out, this is typically your retail trader. The next step, is a domino effect onto more retail investors having to repay their debts. Furthermore, the price increase leads to regular traders buying more of the stock, which causes prices to rise more. Later, institutional investors are forced to liquidate their positions, to repay the debt, which leads to a large price increase. Finally, FOMO kicks in, which causes retail investors to buy increasing the price of the assets further. Thanks to the transparency of blockchain technology, and smart-contract technology, analysing potential short-squeezes becomes easier than ever.

How to spot a crypto short squeeze?

A short squeeze typically occurs with a heavy number of open short positions. In traditional stocks, these statistics are hard to follow, however with crypto, analytics becomes more widely accessible. The first step to spot a crypto short squeeze is thus to check all open short positions. This would be a great indicator for a recipe of a short squeeze in crypto. However, this is simply a hint that a short squeeze could occur and not reassurance that it's coming for sure. In fact, as long as institutions and people have money to back up their shorts, a short squeeze will not happen.

Another indicator of a crypto short squeeze occurring, the total number of liquidated short positions in the last 24hrs. Comparing the total number of liquidated shorts, allows you to analyse a squeeze while it's happening.

You can collect the aforementioned information on various websites depending on your requirements. When looking into a bitcoin short squeeze, we recommend collecting this data from GlassNode. Alternatively, if you're looking for analytics on a DeFi project, we recommend reading our article on "Top 3 DeFi Analytics Platforms [2022]".

Disclaimer

The strongest mind when it comes to your financial freedom is your own. For that purpose we strongly recommend that you gather information and data yourself, to properly prepare for a crypto short squeeze. Furthermore, it's imperative to keep in mind, although markets may seem ready for a short squeeze, it doesn't necessarily mean that it will happen, particularly when it comes to crypto.