OP 24 October, 2023 - 09:11 PM
Short squeeze - a situation when the growth in the price of an asset is caused by an excessive accumulation of short positions, the closing of which creates additional demand for the purchase of the asset and leads to further price growth
What is a short position (short)?
Before we talk about short-squeeze, it is necessary to define a short position in trading. When opening a short position, a trader borrows an asset from a broker or stock exchange, using his funds as collateral. Such a position can be closed by buying back a similar volume of the asset at the current price. Profit is formed when the price of the asset decreases.
For example, a market participant opened a short on the exchange for 1 BTC at a price of $30,000 per coin. After some time, the price of bitcoin fell to $25,000, and the trader decided to buy back the borrowed asset. The difference between the sale and purchase price, i.e. $5,000, is the profit.
An increase in the price of the asset after the short is opened results in a loss. If the trader's balance does not have enough equity to cover them, a margin call occurs, which can lead to a forced closing of the position (liquidation).
How is a short-squeeze formed?
One of the main reasons for the appearance of short-squeeze is a dense accumulation of open short positions at a certain price level. When quotations move upward, market participants are forced to limit risks and close unprofitable shorts.
Since it is necessary to buy an asset to close a short position, it only increases the demand during the growth of its price. This, in turn, pushes the price upward even more, increases losses for short position holders and leads to mass liquidations.
The automated nature of modern stock trading, possible panic and increased volumes can create huge price spikes of several tens of percent. Moreover, in some cases, a short squeeze can bring an asset to a trading halt.
What is a short position (short)?
Before we talk about short-squeeze, it is necessary to define a short position in trading. When opening a short position, a trader borrows an asset from a broker or stock exchange, using his funds as collateral. Such a position can be closed by buying back a similar volume of the asset at the current price. Profit is formed when the price of the asset decreases.
For example, a market participant opened a short on the exchange for 1 BTC at a price of $30,000 per coin. After some time, the price of bitcoin fell to $25,000, and the trader decided to buy back the borrowed asset. The difference between the sale and purchase price, i.e. $5,000, is the profit.
An increase in the price of the asset after the short is opened results in a loss. If the trader's balance does not have enough equity to cover them, a margin call occurs, which can lead to a forced closing of the position (liquidation).
How is a short-squeeze formed?
One of the main reasons for the appearance of short-squeeze is a dense accumulation of open short positions at a certain price level. When quotations move upward, market participants are forced to limit risks and close unprofitable shorts.
Since it is necessary to buy an asset to close a short position, it only increases the demand during the growth of its price. This, in turn, pushes the price upward even more, increases losses for short position holders and leads to mass liquidations.
The automated nature of modern stock trading, possible panic and increased volumes can create huge price spikes of several tens of percent. Moreover, in some cases, a short squeeze can bring an asset to a trading halt.