Steemit Crypto Academy Contest / S13W4 - Short Squeeze

Assalamualaikum everyone!

Welcome to the post. Hopefully, all of you will be good and enjoying the time with the grace and blessings of Almighty Allah. Today, I'm here to be a part of the week 4 contest in the SteemitCryptoAcademy community. The topic of discussion for this week is very much intestine, Short Squeeze. So, let's start the fun without any wastage of time.

What are Short Squeeze? From your own opinion.

In cryptocurrency trading, a short squeeze is a sudden and unexpected increase in the price of a cryptocurrency caused by a significant number of short sellers who to buy back their positions in order to minimise their losses. This can occur when there is a sudden buying pressure, such as encouraging news or announcements, or retail investors pouring into the market.

Short sellers are investors who believe on a cryptocurrency's price falling. They accomplish this by borrowing cryptocurrency from an exchange and selling it at market value. If the cryptocurrency's price falls, the short seller can again buy the same token or coin at a cheaper price and return it to the exchange, thus make benefits from the price differences.

If the cryptocurrency's price unexpectedly pumps, short sellers may be forced or obliged to buy back their trades at a loss. This is due to the fact that they must close out their positions before they are margin called, which means that the exchange requires them to repay the borrowed cryptocurrency plus any interest.

When a short squeeze occurs, the price of a cryptocurrency might pumps fast and sharply. This might be a beneficial scenario for long-term investors, but it can also be dangerous for inexperienced traders. Short squeezes, in my opinion, are a natural and healthy component of the cryptocurrency market. They can help the traders in the improvements of oversold positions and the prevention of market manipulation by short sellers. However, it is critical to be aware of the risks connected with short squeezes and trade with great care.

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

There are many events in the history of the crypto market when we have seen the scenario of the short squeeze in the crypto market. Let me discuss some two of them.

1. BTC/USDT:

The short squeeze scenario was noted in the Bitcoin versus USDT market in the recent days. As you all know that the overall market is moving in the bullish trend, these days. This was actually the result of the short squeeze in the market. First of all, have a look at the below picture and then I will explain it.

In the above screenshot, you can clearly seen that the timeframe of the chart is 1D. I have mentioned with a yellowish box that the market moved down due to the short trades in the market and then, due to some sort of positive news, the market took an opposite turn towards the uptrend.

Right after the start of the increase in the price, the short traders become afraid if they will lose a lot of funds so they started backing their positions by buying the Bitcoins and thus it created a huge buying potential in the market. At last, you can easily notice that the price made a very sharp pump and it increased from roughly $26K and now it's moving around $37K. This is a huge pump within just three weeks.

2. SOL/USDT:

Now, we have another pair of the cryptocurrency assets SOL and USDT. We have noticed a short squeeze scenario in this pair in the last days of the year 2022. Have a look at the below chart in this regard.

The price just moved down abruptly in the last days of December 2022 and this was because of the fact that the short traders were controlling the market trend towards bear. Then, a positive news or any other positive factor effected the market and it just started making pumps.

The short sellers, in a panic situation, started picking up the Long trades or executing the buy orders which effected the price movement a lot and it started pumping up abruptly. This thing created a short squeeze in the market and we were able to seen huge pump in the price of SOL coin in the start of the new year 2023.

How is a Short Squeeze formed?

As I have already said that, when a large number of short sellers are forced to buy back their positions at a higher price than they sold them at, then a short squeeze occurs. This can happen due to a number of reasons, the most important of which is an unexpected increase in the demand for the asset that was previously being shorted. There some steps or processes that are involved in the creation of a short squeeze in the market and these are listed below.

First of all, a large number of short sellers expect an asset's price to fall. They accomplish this by borrowing the funds from an exchange and selling it at market value. If the asset's price decreases, short sellers can buy it back at a lower price, return it to the exchange, and in this way they take advantage from the market fluctuations even in the downward direction.

And when the price of the coin or token unexpectedly begins to pump or rise. This could be due to a variety of circumstances including good news about the coin or the project, the greater demand of that coin, or a reduction in circulating supply of the token in the market.

When these type of circumstances are seen in the market, the short sellers begin to face huge losses. In this way, short sellers are forced to mark their positions to market as the price of the assets rises, which make them aware that their losses are realised.

Due to the whole mess that occurs that is created against the favour of the short sellers, they begin to close out their short positions. Short sellers begin to buy back the asset which they shorted in order to limit their losses. This raises the asset's price even further.

And in this way, a short squeeze is formed in the market. As more short sellers cover their positions, demand for the asset rises the more, pushing the price even higher. This can lead to a great cycle in which the rising price encourages more short sellers to cover their positions, moving up the price even more and more.

We have seen many short squeeze cases in the crypto market so far. A short squeeze also occurred in the Bitcoin (BTC) market in the year 2021, which causes the price to rise from roughly $30,000 to $65,000 in a few of weeks. Another example could be seen in the market of the Dogecoin (DOGE) which was occurred in 2022 and caused the price to rise from almost $0.005$ to more than 0.70$. So, these are some example that have been seen in the market.

Advantages and disadvantages of this strategy.

We all know that there is nothing perfect in this universe. The thing which has advantages, also have drawbacks on the other hand. So, the same is the case with the short squeeze. There are some advantages as well as disadvantages that are related to this strategy. Some of them are listed below.

Advantages of Short Squeeze:

• The most important advantage of the short squeezes is that it can result in very big profits because the asset's price can climb very quickly and abruptly.

• Another thing to notice is that it also plays an important role in the correction of oversold conditions. Short squeezes might help to correct market oversold conditions.

• Long-term investors may benefit from this because it may lead to a more potential price increase. This is also a great benefit of the short squeeze occurrence.

• Short squeezes can also help avoid market manipulation by preventing short sellers from manipulating the market. This is because short sellers are forced to repurchase their positions at a loss, which can cause the asset's price to rise.

Now, moving towards the Disadvantages:

• The first disadvantage is that the short squeezes are extremely risky since the price of an asset can fall just as quickly as it can rise. This means that traders can face significant losses if they do not manage their holdings properly.

• Another thing is that the short squeezes can cause considerable market volatility. This can cause a very difficult situations for the traders and analysts to predict the market upcoming movements.

• Short squeezes are very uncommon and rare occurrences in the market. As a result, identifying the perfect moments to trade them can be challenging for the traders.

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

As we have already discussed all the details about the short squeeze in the above sections so now we will move towards finding out a short squeeze scenario in the market of our own STEEM coin as we are connected very much to this great platform.

Yes, the short squeeze scenario are also present in the market of the Steem token. It was seen a few months ago when we seen an abrupt and sharp pump in the market of the Steem token. So, have a look at the below chart to see the short squeeze scenario in the Steem market.

In the above screenshot, I have mentioned the yellowish box which represents the time when the market was moving a bit down due to the short traders who were expecting the price of Steem token to fall further so that they could make some good profits.

But, fortunately something happened in the favor of the Steem platform and price starting increasing which forced the traders to back their positions with the Buy Orders and Long Trades. These traders and orders created a huge buying potential in the market and thus the market price started pumping. So, this is the explanation of a short squeeze scenario in the Steem market.

Conclusions

Short Squeeze is actually a market situation which is created when the short traders who were expecting the price to fall previously, are forced to buy back the same tokens or open the Long positions due to small pumps. By their these buying orders, the buying potential increases in the market and thus the demand is increased which causes the abrupt and continuous pump in the market of that token. The inexperienced traders should be very careful while spotting these conditions and stay aware about the high fluctuations in the crypto space.

Note: All Screenshots are Taken From TradingView.

I would like to invite my friends @artist1111, @aaliarubab and @solaymann to be a part of this amazing contest.