Steemit Crypto Academy Contest / S13W4 - Short Squeeze

Greetings, my dear friends. How are you all? I hope you are all well. Today, after a long time, I am here again to participate in the contest organised by the beautiful crypto academy. Sorry that I have been absent for some past weeks; it was just due to some health issues and a busy schedule, but I have been active again from now on.

What are Short Squeeze? From your own opinion.

My friends, In the crypto market or any other financial market like stock etc, a short squeeze occurs when a significant number of short sellers cover their positions, causing the price of a cryptocurrency to rise sharply and quickly. It is a widely used technique in the crypto trading and it involves the following things.

Rising Prices: Short sellers are under pressure if the price of cryptocurrencies begins to rise rather than fall. They run the danger of suffering the potential losses if they don't cover their short positions on time.

Forced Buying: Short sellers may begin to purchase cryptocurrencies when the price rises in order to liquidate their holdings. The price is further increased by this buying activity.

Positive Feedback by the Market: As prices rise, more short sellers cover their trades, which encourages more buying and drives up prices even further. As a result, there is a feedback loop due to which growing prices compel more short sellers to purchase, hence pumping up the price.

Panic Buying: As the short squeeze gets more intense, additional traders and investors may seek to take advantage of the upward momentum by buying in panic. This may result in a sharp increase in price.

Volatility: Because the price can fluctuate quickly and continuously, short squeezes are frequently associated with considerable volatility in the crypto market.

With a couple of assets (cryptocurrencies) show an example of a Short Squeeze. Screenshots are required.

Actually, Short Squeeze is commonly seen in different kind of market and especially in the cryptocurrency market because of the high degree of volatility in the market of the crypto assets.

I have recently seen a short squeeze in the market of the Solana (SOL). This short squeeze was seen the SOL/USDT pair and first of all look at the screenshot and then I will the scenario.

Tradingview

You can see an abrupt pump in the market of the Solana coin. This was seen on 30th of October. The timeframe of the above chart is 30 minutes, there was a clear pump that lead the price of SOL from 30$ to 34$.

This happened as the short investors was thinking that the market will move further down and keep it's bearish trend but due to an expected news, the market made the upward movement.

When the investors realized that the market will be bull shortly so they started buying the asset in order to minimize their losses in the short position and this huge buying potential lead the abrupt increase in the price.

How is a Short Squeeze formed?

My dear friends, a short squeeze results from the interaction of supply and demand, trading behavior, and market dynamics. Let us discuss the creation of a short squeeze step by step for your understanding:

Short Selling: Using a short-selling technique is the first step for traders. In short selling, an asset (a cryptocurrency in this case) is borrowed and sold on the market with the hope that its value will decrease. Traders hope to profit from the price movement by returning the asset to the lender and buying it back later at a reduced cost.

High Short Interest: As more traders decide to sell a cryptocurrency short, the amount of short interest in it increases. Short interest is a measure of all the crypto coins that have been traded short on the market. The significant short interest indicates that many traders are placing trades on the cryptocurrency's price to decline.

Growing Prices: The price of a cryptocurrency rises due to a market manipulator or any positive news. Numerous things could be the cause of this, such as positive news, increased demand, or an unexpected increase in sales.

Forced Covering: Short sellers who have borrowed the asset and sold it short start to face pressure when the price of the cryptocurrency rises. They have a limited amount of time to fill their this process. They run the danger of suffering large losses if they don't do it.

Purchasing to Cover: Short sellers begin purchasing cryptocurrencies to cover their trade loses in order to prevent additional losses. The demand for the cryptocurrency increases as a result of these purchases, driving up its price.

Panic Buying: As the short squeeze happens, it can lead to panic buying among other traders and investors who want to take advantage of the upward momentum. This can cause the price to pump potentially.

Volatility: Short squeezes are often characterized by high volatility, as the price can experience rapid and unpredictable swings during the process.

So, it is the complete explanation of the formation of the short squeeze in the market of cryptocurrencies which is highly volatile.

Advantages and disadvantages of this strategy.

A short squeeze is a market event that can happen for a number of reasons; it is not a trading method itself. There may be advantages and disadvantages from short squeezes for short sellers as well as other market manipulators. Now let's discuss the benefits and drawbacks of short squeezes:

Advantages:

• First of all, a short squeeze can be advantageous to long traders, or those who have traded on an asset's price increasing, since it can cause sharp price gains that happen quickly. Long traders can benefit significantly if they accurately predict a short squeeze and position themselves accordingly.

• Secondly, short squeezes can help in the correction of market fluctuations. They have the potential to reveal extended short positions and move asset prices in the direction of their potential values.

• Thirdly, Short squeezes frequently lead to increase trading activity and market liquidity. For traders, this may make it simpler to enter or exit positions.

• And, high volatility during short squeezes provide a favorable environment for traders who are comfortable with bad market conditions. There are benefits to volatility for day scalp traders mostly.

Disadvantages:

• The biggest drawback of a short squeeze is what short sellers go through. A short squeeze results in losses for short sellers because they are compelled to cover their bets by repurchasing the asset at higher prices. These losses may be significant in extreme circumstances.

• Secondly, the nature of short squeezes is very much unexpected. It is difficult for traders to predict when they will happen, which makes it difficult to prepare for or avoid them.

• Last but not least, certain market participants have the ability to influence or develop short squeezes, raising questions about the integrity of the market. For their own gain, individuals or organizations with high resources could take part in actions that disturbs a short squeeze and hence manipulate the market.

Show the Short Squeeze strategy on a Steem/Usdt chart and explain.

Our beloved Steem coin also have gone through an event of the Short Squeeze in the recent days. It happened very recently when we seen a magnificent pump in the price of Steem token. It started from the 18th of October and lasted as long as 25th of October 2023.

First, take a look at the below snapshot and then I will explain the whole scenario.

Tradingview

You can see a very sharp pump in the Steem price. Before the pump, I have mentioned a box where the short traders were happily opening the short trades the overall market trend was already bearish and they wanted a potential gain by their short trades.

But, due to a positive news about the Steem coin the price of the Steem token started pushing itself upwards. At that time, the short traders become panic and started closing their short trades in loss and opening the buying trades so thar they could minimize their loss ratio.

Due to the huge buying potential in the market, the demand of the Steem token increased a lot and hence it contribute towards increasing the price of the Steem token. This scenario is totally called as the Short Squeeze.

Conclusion

In this post, we have discussed the Short Squeeze which is an event that occur due to the unexpected positive news in the market of a coin. The short traders of the market quickly stop or exit their positions and then started buying the token or coin due to an expected positive news about the market which pushes the market more and more and hence created a potential pump in the market.