Understanding Short Squeeze in Crypto

One of these days, I was opportune to come across an opportunity while Mining a shit coin in my phone. This coin has lots of display like levels so to speak and one of the cards says short squeeze. You must keep upgrading the card to get more from the app itself. I go that word short squeeze from there and decided to do some research in order to find out what were associated with this term.

Short Squeeze

It is a phenomenon that occurs in the crypto market mostly where a heavily shorted stock price begins yo increase, making sellers of short positions to buy shares and cover their own positions. Their intervention in this drives the increase of the price and can lead to rapid price increase over a short period of time.

I'm very such at first you may have compared it with short selling as being similar. There are some similarities and major differences. These short sellers who are forced to buy back shares or positions as the prices rises are those who borrowed it may have sold their shares with the expectation that the price would drop as the name implies.

This short squeeze is as a result of unexpected market movements and optimism. Some terms that are worthy of note in this short squeeze are;

• High interest in short i.e a particular percentage of a stock's available assets are sold short.

• An unexpected movement in the market occurs which causes the price of the stock to spark at a very quickly.

• Sellers who shorted must buy back their shares as a cover up due to the increase.

Let me break down these characteristics as they also serve as conditions in which this is possible.

• Concerning Short interest being high, the short interest serve as the total number of shares sold by investors that hasn't been covered yet . It's usually expressed as outstanding total shares in percentages. It indicates that a large number of investors are betting against the stock, anticipating its fall.

When the price of this stock increases, the short sellers would be forced to cover their positions to avoid losses which may lead to increased buying activity or pressure from these investors. This pressure can even drive the price of the stock higher than how it is already.

• When there are unexpected developments in the market, it can lead to increased buying interest from investors are traders ego seek to capitalize on the positive development.

• Low float and high demand is also a condition: This float refers to a the number of shares that's available for trading by the public. A low float means that there are lesser shares available for trading leading to high volatility and significant swings in prices.

• High demand : This high demand is as a result of imbalance between demand and supply as there may be increased demand for a particular stock.

An Example of the above: Let's imagine a biotech company that specializes on pharmaceuticals which has a high short squeeze interest due to skepticism about it drug system. If this company eventually announces the approval for a new blockbuster drug by FDA, the price of that stock may strike up overnight. This is as a result of positive breed in the market and will for e short sellers to cover up their positions quickly which would lead to more surges due to the combined effect of new investor interest and covering of those shorts.

In conclusion, a squeeze is a market condition where rapid movements in prices of a stock forces traders in certain positions to exit their trades resulting in price volatility that are significant. So short squeezes depends or is driven by high short interest and positive news in the crypto market.

All screenshots are from my binance

Disclaimer :Any financial and crypto market information provided in this post was written for informational purposes only and does not constitute 100% investment advice. It's just basic knowledge every crypto trader or investor should have