Steemit Crypto Academy Contest / S13W4 - Short Squeeze

Edited using Pixellab App

INTRODUCTION

Greetings friends, welcome to another exciting week of the engagement challenge. This week, we are looking at the concept of a Short Squeeze trading strategy on the Cryptocurrency market. Let's get squeezing, shall we?

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What is Short Squeeze? From your own opinion

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Like always, before I go into details on what I think of Short Squeeze, I believe knowing the meaning of the words "Short" and "Squeeze" will help.

SHORT in its literal meaning means not long, extended in length or duration. It refers to something small in size or amount. Something that has a limited length or period. Relating to finance and crypto, "short" means the opposite of "long" and refers to a position where someone expects the price of an asset to go down.

SQUEEZE On the other hand, means to apply pressure or force in a tight space.

Hence, "SHORT SQUEEZE" in crypto is said to be when the price of an asset is being pushed up because traders who took short positions are rushing to buy it back, causing a squeeze in the market.

A short squeeze in the world of cryptocurrency occurs when a large number of investors have taken "short" positions on a particular cryptocurrency. In simpler terms, they have borrowed and sold the cryptocurrency with the expectation that its price will decrease.

Now, imagine something unexpected happened in the market, causing the price of the crypto to start rising rapidly. This sudden surge in price creates a sense of urgency among those who have gone short on the crypto making them realize that if they don't act quickly, they may end up losing a good amount or all of their investment.

Hence, to recover their "short" position and limit their losses, these short sellers go in to buy back the crypto they initially borrowed and sold. However, as more investors who had initially gone short go back to buy back the crypto, the demand for the crypto increases greatly, which, in turn, pushes up the price even further.

This increased demand and buying pressure (squeeze) create a feedback loop, amplifying the upward rate of the cryptocurrency's price. This results in the short sellers being in an unsafe position, which is referred to as a "Short Squeeze."

During this short squeeze, the price of the cryptocurrency may shoot up, leading to a chain reaction, as more short sellers rush to buy back the cryptocurrency, it keeps pushing the price up.

For Example, let's say investors assume Bitcoin price will drop, so they borrow Bitcoin and sell hoping to buy it back at a lower price and make a profit from the difference. But then, a surprising thing happens which leads to the rise of Bitcoin price instead of the price drop as earlier expected by the investors.

Now, those who borrowed Bitcoin need to buy it back to repay their loans and rush back to buy Bitcoin to cut their losses. This in turn leads to an increase in demand for Bitcoin, thereby causing the price to rise even higher leading to a short squeeze.

From the above example, we can see that certain factors are responsible for the cause of Short Squeeze. Some of the factors that can cause a short squeeze in cryptocurrency are:

Positive News or Developments:

When there is unexpected positive news or significant developments about a particular cryptocurrency, it can attract new buyers and increase demand. This surge in demand can catch short sellers off guard and lead to a short squeeze.

Crowded Trades:

Is when a large number of investors take short positions on a cryptocurrency. Then, if the price of this cryptocurrency begins to rise suddenly, these investors who have gone short may rush to cover their positions, causing a rise in buying activity, and further driving up the price.

Market Manipulation:

In some cases, market manipulation or coordinated buying efforts by a group of investors can contribute to a short squeeze. This happens when such traders intentionally create buying pressure to force short sellers out of their positions and drive up the price.

Investor Sentiment:

Market sentiment and investor behavior play an important role in short squeezes. If there is a sudden shift in sentiment, with more investors becoming bullish on a cryptocurrency, it can lead to increased buying activity and a potential short squeeze.

However, even with all these factors it's important to keep in mind that short squeezes are unpredictable and volatile.

How can a user identify a Short Squeeze?

For a user to be able to identify a potential short squeeze in the cryptocurrency market, the user can look out for;

Rapid Price Increase:

If a cryptocurrency's price experiences a sudden and notable increase over a short time interval, it could indicate a short squeeze. This rapid rise may be caused by short sellers rushing to recover their positions, leading to increased buying pressure.

High Trading Volume:

A short squeeze often accompanies a rise in trading volume. If there is a notable increase in trading activity, especially with a rising price, it suggests that a short squeeze may be occurring as short sellers scramble to exit their positions.

Increased Volatility:

Short squeezes can cause intensified market volatility, causing larger price swings, sharp upward movements, and increased price instabilities as short sellers and buyers compete in the market.

Short Interest Ratio:

Monitoring the short interest ratio, which represents the number of shorted shares or contracts relative to the total outstanding shares or contracts, can provide insights. This can be calculated using the formula;

Edited using Pixellab App

Short Interest Ratio = Short Interest / Average Daily Trading Volume

Where;

• Short Interest => the total number of shares that have been sold short in the market.

• Average Daily Trading Volume => the average number of cryptocurrency units traded in a particular digital currency or token in a day.

A high short-interest ratio indicates a higher potential for a short squeeze.

News and Sentiment:

Keep an eye on news and investor sentiment surrounding cryptocurrency as positive news, developments, or a shift in sentiment toward bullishness can cause a short squeeze.

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

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The phenomenon of Short Squeeze occurs in all financial markets, but more so in the crypto market as it is a more volatile market, to this effect, there have been many cases of Short Squeezes, and below are some examples;

• Dogecoin (DOGE):

In early 2021, Dogecoin experienced a Short Squeeze when it became the center of attention on social media platforms which led to the widespread buying of the coin, this caused the price to skyrocket, catching short sellers off guard and led to a short squeeze.

SC showing the Short Squeeze strategy on Dogecoin

SC showing the short movement	SC showing the peak movement

All screenshots are taken from CoinMarketCap.com

• XRP (XRP):

In February 2021, XRP experienced a short squeeze after the price started rising rapidly. This sudden surge in demand forced short sellers to buy back their positions, contributing to further price increases.

SC showing the Short Squeeze strategy on Ripple (XRP)

Screenshot taken from CoinMarketCap.com

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How is a Short Squeeze formed?

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Short squeezes form as a result of those factors that create a situation where short sellers are compelled to exit their positions, causing a rapid price increase. These factors include;

Short Selling:

Short selling is a procedure where traders borrow an asset (crypto) and sell it, hoping to buy it back at a lower price later and make a profit from the difference, believing the price will go down or decrease.

High Short Interest:

When a cryptocurrency has a high number of short positions, it means many traders have borrowed and sold the asset, anticipating a price drop. This creates a large pool of potential buyers if the price starts to rise.

Positive News or Sentiment:

Positive news, developments, or a shift in sentiment can initiate increased buying interest in a cryptocurrency. This can be caused by factors such as partnerships, new technology, regulatory approvals, or even social media hype (like DogeCoin).

Price Starts Rising:

If the price of a cryptocurrency begins to rise, it can catch short sellers unprepared. Hence, as the price increases, short sellers may start feeling pressured to cut their losses and buy back the asset to close their positions.

Buying Pressure:

This happens when short sellers rush to buy back a cryptocurrency they've gone short on, it creates additional buying or demand pressure in the market. This increase in demand, combined with limited supply, can lead to a rapid and significant price increase.

Feedback Loop:

The rising price and buying pressure can initiate a feedback loop. As the price continues to rise, more short sellers exit their positions, causing further buying pressure and pushing the price even higher.

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Advantages and disadvantages of this strategy

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Advantages of this strategy

The Short Squeeze strategy can have potential advantages for certain market participants, advantages such as;

Profit Potential:

Traders who can identify and capitalize on a short squeeze can potentially make significant profits. By buying the cryptocurrency early and selling it at a higher price during the squeeze, they can benefit from the upward price movement.

Increased Market Liquidity:

Short squeezes can bring about an increase in buying activity in the market, which in turn leads to an increase in liquidity. This can create more opportunities for traders to enter or exit positions with ease.

Market Disruption:

Short Squeeze can disrupt the status quo and challenge the dominance of short sellers. This can lead to a more balanced market and prevent excessive downward pressure on the cryptocurrency's price.

Positive Sentiment:

Short squeezes can generate positive sentiment and excitement among traders and investors. The increased attention and enthusiasm can create a positive feedback loop, attracting more participants and potentially driving the price even higher.

Market Awareness:

Short squeezes can draw attention to a particular cryptocurrency and increase awareness of its potential value. This can lead to increased adoption, partnerships, and overall market development.

Disadvantages of this strategy

Volatility:

Short squeezes can lead to extreme price volatility. While this can create profit opportunities, it also increases the risk of sudden and significant price fluctuations, which can result in losses for traders who are not prepared or unable to react quickly.

Market Manipulation:

Short squeezes can be susceptible to market manipulation. Unscrupulous actors may artificially inflate the price of a cryptocurrency to trigger a short squeeze, only to sell off their holdings once the price reaches a peak, leaving other traders with losses.

Limited time frame:

Short squeezes are often short-lived and can occur rapidly. Traders must be able to identify and act on the squeeze within a limited timeframe. Failing to do so may result in missed opportunities or losses if the price quickly reverts to its previous levels.

High Risk:

Participating in short squeezes involves a higher level of risk compared to regular trading. The rapid price movements and increased volatility can lead to substantial losses if traders are not experienced or do not have a solid understanding of the market dynamics.

Emotional Decision-Making:

The excitement and hype surrounding short squeezes can lead to emotional decision-making. Traders may be tempted to enter positions without proper analysis or risk management, which can result in poor investment choices and potential losses.

Unpredictability:

The occurrence of a Short Squeeze can be difficult to predict accurately, even as certain factors may indicate the potential for a squeeze, there is no guarantee that it will occur or how long it will last.

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

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Imagine that our beloved Steem cryptocurrency has been experiencing a prolonged downtrend, with many traders taking short positions, expecting the price to continue falling.

As the price of Steem starts to show signs of upward momentum, these traders anticipate that the short sellers will start closing their positions to limit their losses. This can create a domino effect, pushing the price even higher as more short sellers rush to cover their positions.

You don't need to imagine, this happened a few days back when the price of Steem skyrocketed after experiencing a downtrend for a while. This uprise in price was a result of positive news about Steem being listed as a future trade pair on MEXC.

	SC showing the short movement

	SC showing the peak movement

SC showing the Short Squeeze strategy on STEEM/USDT

All screenshots are taken from Binance.com

From the screenshots above, we can see how investors where going short on STEEM/USDT on 18th October 2023, which continued to 19th, but price started increasing from 20th, as users anticipating MEXC listing of the STEEM/USDT future trading pair.

This uprise in price continued till 24th, as users continued to demand for STEEM, increasing STEEM demand meant increase in price, which also led to users who have gone short to buy back, to cut their losses.

CONCLUSION

In conclusion, as attractive as Short Squeeze's trading strategy may seem, it is important for traders to thoroughly understand the risks that come with Short Squeeze when they choose to participate in such a market strategy.

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I wish to invite @anasuleidy, @ninapenda, @ruthjoe, @drhira and @suboohi

Thank You for your Time

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NOTE: Always have a smile on your face, as you are never fully dressed without one.