Short squeeze

A short squeeze happens when the price of an asset rises sharply and forces traders who bet on a fall (shorts) to buy back in order to limit their losses. Their buying pushes the price even higher, forcing more shorts to close, in a self-reinforcing loop.

Crypto is prone to squeezes because so much trading happens on leveraged perpetual futures. When many traders are short, funding rates turn negative and liquidation prices cluster at similar levels. A modest rally can trigger a wave of automatic short liquidations, each of which is effectively a market buy, producing a sudden spike in price within minutes.

The opposite is a long squeeze, or long liquidation cascade, where falling prices force leveraged longs out and accelerate a drop. Traders watch open interest, funding rates and liquidation heatmaps to gauge squeeze risk, but squeezes are hard to time, and chasing one is itself a high-risk trade.