Short Squeeze Means: When Short Sellers Are Forced to Buy

What Happens During a Short Squeeze?

A short squeeze essentially means that the price of an asset rises sharply because many traders who have bet on a decline are suddenly forced to buy their positions back. When you short – that is, borrow an asset and sell it in the hope of buying it back later at a lower price – you risk being forced out if the market moves against you.

Short sellers lose money when the price rises. The higher it goes, the larger their losses become. Eventually, the pressure becomes so great that they can no longer hold out and buy back to close their positions. When thousands of traders do this simultaneously, it creates explosive demand. The price skyrockets. This is the meaning of short squeeze in practice.

The Mechanism: From Stasis to Chaos

In short: Short sellers close → They buy → Prices rise → More short sellers are forced to close → Even more buying → The price spiral continues.

This happens especially in markets with high leverage. The Bitcoin derivatives markets are full of traders using 5x, 10x, or even 50x leverage. A small price movement can get their entire position automatically liquidated. When liquidations start, stop-loss orders are triggered in a domino effect that can dramatically accelerate price movements.

The number of long versus short positions is crucial here. The more shorts there are in the market, the greater the potential for a squeeze. It is common within the trader community to follow the long/short ratio – if there is suddenly an imbalance against short positions, a move may be on the way.

From the Stock Market to Crypto

Tesla (TSLA) is often cited as a historical example. The stock was massively shorted, but prices rose time and again. Each downward drop was met with new shorts, which were subsequently squeezed out during the next rise. This pattern repeated itself.

In the cryptocurrency markets, especially the Bitcoin market, short squeezes are even more dramatic. Only small price movements in the derivative markets are needed to trigger mass liquidations. Bitcoin has experienced several intense squeezes, particularly during periods of instability.

A classic example was the beginning of 2019. Bitcoin was held in a tight range after a significant drop. Market sentiment was bearish – many were waiting for further declines and shorting aggressively. But then the price broke through the resistance level with such force that it never looked back. It was not until years later, during the coronavirus crisis, that it reached the old range again.

The Risk of Being Caught in a Squeeze

If you short without understanding the short squeeze risk, it can get expensive. There is no upper limit to how high the price can go – but your losses can be infinitely large. At the same time, you can be liquidated without warning if you use high leverage.

The worst case? You short with 10x leverage, and the price increases by 15%. Poof – your position is gone. Worse, if liquidation is triggered among millions of other traders at the same time, prices can spike so hard that you get an even worse price.

Long Squeeze: The Reverse

Although it is less common, the opposite phenomenon exists: long squeeze. This occurs when long positions are squeezed under massive selling pressure. If you are holding long with high leverage, you should be aware of this scenario as well.

How to Take Advantage of It?

Experienced traders see long squeeze opportunities and position themselves in advance. Before they expect a short squeeze to develop, they patiently set up long positions. When the price starts to explode – boom – they sell at much higher levels. It’s a high risk, high reward strategy.

Always a Technical Event, Never a Fundamental

Here is an important distinction: Short squeezes are technical patterns, not fundamental events. They are not caused by bad or good news – they are due to market mechanics and psychology. A stock or crypto can be fundamentally weak but technically pressured completely skewed due to a squeeze.

The Most Important to Remember

A short squeeze means being forced out of your positions with maximum pain. This happens faster in highly leveraged markets like Bitcoin derivatives. Before you short or go long with high leverage, you should have a solid risk management strategy in place. Otherwise, you risk significant losses.

Understand the mechanism, respect the volatility, and be prepared. This way, you avoid becoming one of the traders who were called in to close their positions at the worst moment.