Recently, I noticed that many people are confused about what a short squeeze actually is. The phenomenon, of course, is not new, but in crypto it works especially sharply due to high volatility and the presence of futures.

Essentially, a short squeeze is a moment when the price of an asset suddenly skyrockets, and traders who bet on the decline end up at a loss. When their positions are liquidated (especially if it happens en masse), they are forced to buy back the asset quickly, which further drives the price up. It creates a vortex — the more liquidations, the higher the price, the more liquidations.

How does it work? First, traders open a bunch of short positions because they believe the price will fall. Then unexpectedly, news comes out, a large buyer appears, or there is simply manipulation — and the price starts to rise. Those in shorts see red numbers. If the growth continues, brokers begin forcibly closing positions, buying the asset at the current rate. This increases demand, the price rises even faster, triggering a chain reaction. That’s what a short squeeze looks like in action — an avalanche that can lead to a parabolic surge.

The most famous example is GME in 2021. Retail investors massively bought up shares, and the price soared from about $20 to $483 in a few days. It was a classic short squeeze that bankrupted many hedge funds.

In crypto, this happens constantly, especially in the futures markets. Bitcoin, altcoins — all are susceptible to this. At the time of writing, BTC is trading around $77.54K (-0.03% in 24 hours), ETH around $2.13K (-0.19%), BNB around $656.90 (+1.12%). When volatility is high, the risk of a squeeze sharply increases.

If you want to avoid falling into the trap or even try to profit from it, look at a few things. First, monitor the percentage of open shorts — if it’s high, the likelihood of a squeeze increases. Second, watch for liquidations on futures platforms — a spike can be a signal that a chain reaction is beginning. Third, pay attention to volumes — if volume suddenly spikes during an upward move, it’s often the first sign that a short squeeze is already starting.

Of course, this is not financial advice, just observations from practice. The market can always surprise, so manage your risk wisely.