For some, short squeezes can represent incredible opportunities for profit. But for others, they can be financially ruinous, since they can throw a spanner into the works of even the most prophetic short strategies. If you are considering trading cryptocurrencies, it is recommended that you always do your own research. Keep in mind that past performance is no guarantee of future returns.
For no apparent reason, you may see that the asset has accumulated a massive number of buy orders. When this happens, you might be missing or a short squeeze is about to happen. There are several ways to avoid being trapped in a short squeeze situation – or at least lessen your losses when the house goes down.
If you want to avoid becoming liquidated or trapped in such moves, carefully assess the amount of leverage you’re utilizing. Thankfully, there is a large number of preventative measures you can take to protect yourself from a short squeeze. We are not a financial advisor and the content on this website is not financial advice.
The massive volume of buy orders from short sellers became one of the factors behind this sudden price surge. Shorting is an effective trading strategy to take advantage of the market decline. By borrowing an asset at its prevailing price (hopefully higher than its future price), the trader can then buy the asset at a discounted price when the downtrend arrives.
As short sellers close their positions, a cascading effect of buy orders adds more fuel to the fire. As such, a short squeeze is typically accompanied by an equivalent spike in trading volume. A short squeeze can be quite exciting, especially if you are a long trader or like to HODL your crypto during rough patches. Short squeezes are quite rare and do not happen to every asset that is heavily shorted. They are more prevalent in the crypto space compared to the stock market due to high volatility. It is also advised that novice traders should not go out looking for short squeezes as they are extremely risky.
Betting on a Short Squeeze
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. The larger the short interest is, the easier it is to trap short sellers and force them to close their positions. In other words, the more liquidity there is to trap, the greater the increase in volatility may be thanks to a short squeeze. In this sense, a short squeeze is a temporary increase in demand while a decrease in supply. The market turns bullish, and selling pressure decreases dramatically.
This means that the short interest in Medicom is 20%, and with daily trading volume averaging one million shares, the short interest ratio is five. The short interest ratio, also called days to cover, means that it will take five days for short sellers to buy back all Medicom shares that have been sold short. It causes the short sellers to reconsider bitfinex recensioni their position and start buying the asset even if they have to take some losses. Remember, every short seller that closes their position automatically turns into a buyer, thus increasing the buying pressure even more. This starts a chain reaction, and the price keeps going up until all or most of the short positions are squeezed.
Why Short Squeezes Happen
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.
- Will a potential contagion lead to an extended cryptocurrency sell-off or will an overcrowded short market leave bears vulnerable to a bitcoin short squeeze?
- A rise in short interest above the norm indicates that investors have become more bearish.
- For example, consider an asset with a short interest of 20% and a short interest ratio, or ‘days to cover,’ of five.
- This squeezes the short-sellers from the market, and usually for a loss.
- A short position allows a trader to sell an asset that they don’t own with the intention of buying it back at lower prices.
Active traders regularly observe highly shorted assets to enter right when the squeeze starts. Still, while there are countless examples of stocks that short squeezed after heavy short interest, there are also assets with high short interest that continue to fall in value. 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.
How to Avoid Getting Caught Up in a Short Squeeze
When there is excessively high short interest, the market can move against short positions, forcing short sellers to cover their positions. This combined with an increase in buying pressure can result in a powerful rally called a short squeeze. Day traders can be trapped in a short squeeze situation if the volume of buy orders increases because short sellers are cutting their losses in lieu of a sudden price surge.
“FTX has created unprecedented market turmoil, resulting in abnormal withdrawal requests which have exceeded our current liquidity,” tweeted Genesis. The network uses the proof-of-work (PoW) consensus mechanism, where miners compete to solve complex cryptographic hash puzzles to validate transactions that are updated to the public ledger. In return, miners are rewarded with bitcoin for verifying blocks of transactions. Trust Wallet is a crypto wallet software that gives its users complete ownership of their crypto funds.
Treasury think the mandatory government debt ceiling is going to be reached in days and it has laid in lots of funky mechanisms to stop the U.S. defaulting. Those money stashes, which are huge, may last until June before the government is out of money to pay the bills. Treasury to use in case the debt ceiling vote turns into a complete shambles, like the last time? The recent election of the new speaker turned into a farce worthy of South America, so raising the debt ceiling might also be a disaster, so best get the liquidity into the system now. 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.
So news of the BlackRock Ethereum ETF triggered a massive short squeeze in crypto. Traders shorting Bitcoin and Ethereum got crushed by easymarkets review the rapid price pumps. When Tesla announced that it would start producing and marketing electric vehicles, it turned around many heads.
This happens when an asset is in short supply, and receives a failed to deliver status. Companies in the past have been accused of naked shorting as part of price manipulation to push prices lower than normally possible. However, several other important Luno exchange review metrics can be measured and analyzed which can tip traders off that a short squeeze is possible. A heavily dominant short-side of the market, combined with soaring open interest, and prices at potential lows are all factors in any short squeeze setup.
