Short Squeeze: How to predict a Bitcoin Short Squeeze?
Short sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall. If they’re right, they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position. If they’re wrong, they’re forced to buy at a higher price and pay the difference between the price they set and its sale price.
- Short squeezes occur when traders force a surge in demand during temporary supply scarcity.
- The market sentiment was fairly clear that Bitcoin’s price would experience a sustained downtrend.
- Market sentiment was likely quite low, as many investors would be looking for short positions, expecting the continuation of the downtrend.
- The short-interest ratio can be used to track market sentiment by observing when the value is outside its usual range.
- Naturally, if you’d like to understand what a short squeeze is, you’ll need to understand what shorting is first.
Using the RSI indicator (Relative Strength Index), you can measure the prevailing buying pressure in the market. Reading the RSI level of the asset will help you predict the occurrence of a short squeeze. For example, the low RSI is attributed to overselling, making the price of crypto drop. With a sudden spike, the RSI increases and indicates an overbought condition, a possible short squeeze scenario. Experienced traders open short positions when they believe a price drop is about to happen. Shorting is an effective trading strategy to take advantage of the market decline.
What is a Short Squeeze in Crypto?
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. Since cryptocurrency prices are highly volatile, short squeezes cannot be avoided.
How to trade short squeezes
One of the most effective short-term market drivers is short squeezes that can cause significant spikes in share price. You can gauge the number of outstanding shorted assets by looking at the percentage of the crypto’s “short interest”. This is a useful insight to avoid a short squeeze because anything above 20 percent may signal an impending surge. 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. Meme stocks, or stocks with viral internet cultural support, have been targets of ongoing short squeezes, starting with GameStop Corp. in 2021.
The Future of Short Squeezes in Crypto: A Roadmap Ahead
Many thought that Robinhood made this decision to protect hedge funds, including those with which it has financial arrangements. Robinhood derives a significant portion of its revenue from selling its retail investors’ order-flow data to hedge funds. Many detractors saw Robinhood’s financial rolls-royce stock prediction 2025 ties to hedge funds as a key motivator behind the platform’s decision to freeze purchases. Genesis, which was described as the “biggest trading desk for professional investors in cryptocurrency markets”, said that panic in the markets had led to “abnormal withdrawal requests” and a bank run.
Securities and Exchange Commission (SEC), naked short selling is illegal. As noted, short sellers open positions on stocks that they believe will decline in price. However sound their reasoning, a positive news story, a product announcement, or an earnings beat that excites the interest of buyers can upend this.
Considering that an equivalent spike in trading volume usually accompanies a short squeeze, panicked short sellers create a dramatic price rise. 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. Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze. Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs.
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. When the cryptocurrency’s price finally begins to climb, though, problems occur for short traders. Rising prices will compel short sellers to cover their positions by purchasing the asset at a higher price.
If that happens, it might not be a good idea to try to recover those losses. However, if the crypto or stock price moves against their trades, short sellers are forced to buy stocks or cryptocurrencies at a much higher price than what they sold them at. A short squeeze, also known as a bear squeeze, occurs when the price of an asset rises quickly, causing short sellers to close out their positions by repurchasing their tokens at an exorbitant price.
Here are the key short squeeze indicators to consider so you can make a financial decision with confidence. For example, when expectations from speculators are high that prices will move in one direction, prices will instead move in the opposite direction. Fear and greed, news, macro factors, and more, can also impact price action. Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes.
But for those with a thorough understanding of how they work, including the conditions that lead to them, they can be incredibly profitable opportunities. Generally, when a short seller opens their position, they borrow and sell the number of tokens they want to short. When you short a stock, hoping it will go down in price, it’s possible to be squeezed out of your position by those looking to drive up the stock’s price.
However, the price found support in a narrow Bollinger Band, which triggered a sharp reversal. Cryptocurrency markets experience short squeezes often, mostly in Bitcoin markets. Some Bitcoin derivatives markets use high leverage positions, which can be liquidated even through relatively small price movements. In markets as volatile as cryptocurrencies, the best way to avoid being liquidated is to manage the amount of leverage you’re using and adopt better risk management strategies.
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. Always choose well-known and established crypto exchanges that have enough liquidity. Coin-margined trading is a form of trading where cryptocurrencies or any other form of digital asset serves… Fortunately, there are several ways to proactively defend yourself against short squeezes.
Make sure you understand the implications of a short squeeze before you enter a short position. If you’d like to learn more about shorting and many other trading techniques, check out A Complete Guide to Cryptocurrency Trading https://bigbostrade.com/ for Beginners. The price was contained in a range after a sharp move to the downside. Market sentiment was likely quite low, as many investors would be looking for short positions, expecting the continuation of the downtrend.
However, like all things in financial markets, short positions do carry risks. Watching short interest can tell you whether investor sentiment about a company is changing. For example, if a stock typically has a 15% to 30% short interest, a move above or below that range could signal that investors have shifted their view of the company. Fewer short shares could mean that the price has risen too high too quickly, or that the short sellers are leaving the stock because it has become too stable. Short sellers zero in on a stock that they think is overvalued by the market.
