What Is Short Squeeze?

Closing a short position means buying back the borrowed asset, that is, buying from the market. If the price starts rising while many short positions have built up in the market, some of the losing investors exit through stop-loss orders and some leveraged ones through forced liquidation. Each exit creates additional buying pressure, the price rises a little more, and this triggers the next group to close their positions.

In the crypto market, short squeezes can be very violent because of highly leveraged perpetual contracts. A funding rate that stays negative for a long time and a high level of open interest can indicate that the short side is crowded. In such an environment, an unexpected positive piece of news can lead to chain short liquidations and a sudden price jump within minutes. Conversely, the chain liquidation of long positions is called a 'long squeeze'.

Short squeezes are usually short-lived, and sharp pullbacks can follow the rally. Because volatility is very high during these periods, both short positions and long positions that joined the rally late can be closed at a serious loss.