What is a short
Short (short) — this is an attempt by traders to make money by selling cryptocurrencies. As opposed to long (long) — this is the desire to make money on the purchase. But what does measurement have to do with it? Aren't we talking about trade?
It's about the nature of the deals themselves. Trading in long is nothing extraordinary. A simple example: you have $70,000, and you buy one bitcoin at a price of $68,700 in the hope that the coin will rise in price to at least $80,000. In general, you can expect this for as long as you want. Thus, the period of time during which the transaction is open, that is, bitcoin in your hands, can be arbitrarily long. Actually, that's why it's called: long.
The short is a little more confusing and definitely more risky. When trying to make money on a sale, you go to margin trading in advance, that is, you trade on credit. Why? Because you're not selling your own products. Example:
1 ETH costs $3,750. You think that the price will drop to $3,000, that is, by 20%. Your desire to become richer is natural. But how to do it? If you just buy ether for $3,750, and it drops to $3,000, you will not gain 20%, but will lose (and pay the commission). There is a short for this case. You take 1 ETH on credit and sell it. Everything went according to your plan: the earnings amounted to 20%. In reality, it is slightly less, since the commissions, and they are higher for the short than for the long (you will have to pay not only for the transaction, but also for the loan).
Well, nature seems to have been sorted out, but where does the name come from? It's simple: any asset falls in price much faster than it grows. Therefore, the attempt to make money on the sale is short. An example again:
Let's say 1 ETH costs $3,750. It drops in price to $3,000, that is, by 20%. But to grow from $3,000 to $3,750, you need to add 25% already. Why? The countdown starts from a smaller amount, although if you look at the absolute value of the change, both are $750.
Having dealt with the short, let's move on to the short squiz.
What is a short-squeeze
Squeeze — this is compression. Then a short squeeze is a decrease in the number of short trades, and usually quite sharply, caused by an increase in the price of a crypto asset. In general, such events are an integral part of any market. However, it is often quite difficult to distinguish short-cuts from ordinary price movements.
A striking example is the situation with Celcius (CEL) in July 2022. It was then that the bankruptcy of the Celcius Network credit company occurred. That is, fundamental factors spoke in favor of reducing the market value of the CEL coin. This point of view was also held by investors who shorted this cryptocurrency. Only in reality, everything turned out to be different at the moment.
In less than five weeks, the CEL token soared in price by 508.53%, from $0.76 to $4.6. Of course, then everything fell into place, and the cryptocurrency fell to record lows. However, from July to August 2022, all shortists were dealt a crushing blow.
Source: tradingview.com
And why is there a short-squeeze?
The reasons for the short-squeeze
There is one reason — the nature of short trades. If the price rises, and you have sold the cryptocurrency, then your losses increase like a snowball. To endure this for a long time, firstly, it is quite difficult from a moral point of view, and secondly, you need a lot of money, since any short assumes the presence of margin collateral. And the further the price increases, the more finance will be required in the account. In most cases, traders simply forcibly liquidate their short positions. And then they start buying themselves: they want to win back.
Well, is short-squiz bad?
Pros and cons of short-squiz
Seriously, no. Short-squeeze is an absolutely neutral phenomenon in the cryptocurrency market, which is caused by the behavior of traders. If you suddenly become a victim of it, it's really only because you tried to raise money quickly without having a proper strategy. Any trade, and even more so margin trading, should be accompanied by a strict risk management system. You must determine your maximum losses in advance and place stop orders. It's not a big deal that you won't earn. But to reset your savings — yes, it's terrible.
At the same time, a number of players earn on short-cuts. In the same story with CEL, people who had a coin from mid-July to mid-August 2022 were able to earn good money. And it's not their problem that the shortists were going broke at the same time. Someone loses, someone finds.
Conclusion
In short, a short squeeze occurs when demand greatly exceeds supply. This chain reaction leads to a massive closure of short positions. In general, the situation is quite standard for crypto assets and does not carry any negativity.