If you trade on the cryptocurrency market, you've probably encountered a phenomenon called a short squeeze. It is one of the most explosive market movements you can see. The essence is simple — a sharp price increase caused by the mass closing of short positions creates an avalanche effect that can send an asset to the moon in just a few hours.

How does it work? It all starts with many traders confident in a price decline opening shorts. They borrow the asset from a broker, sell it on the market, and wait for the price to fall so they can buy back cheaper and close their position with a profit. But then an unexpected news event, a large purchase, or simply market manipulation occurs — and the price suddenly begins to rise.

Now, those holding shorts find themselves at a loss. And the higher the price rises, the greater the loss. Brokers begin liquidating positions — forcibly closing shorts by buying back the asset at the current rate. This creates additional demand, which further pushes the price upward. It becomes a vicious cycle: the more liquidations, the stronger the rise, and the more new liquidations occur. This is the pure form of a short squeeze.

Remember GameStop in 2021? It was one of the most famous examples of a short squeeze in financial market history. The stock soared from $20 to $483 in just a few days thanks to mass retail investor buying. The crypto market also regularly experiences such events, especially when volatility is sky-high and many shorts accumulate in the futures market.

How to use this in your trading? First, monitor the percentage of short positions — a high level of shorts can be a signal of a potential squeeze. Second, pay attention to spikes in liquidations on the futures market, as they often trigger a chain reaction. And third, watch trading volumes — a sharp increase in volumes during an upward movement is usually the first sign that a short squeeze is beginning.

However, remember that this is informational material, not financial advice. Trade carefully and always manage your risk. On Gate, you can track the movements of BTC ($81.22K, +2.17%), ETH ($2.28K, +0.77%), and other assets in real time to catch such moments.