Short Squeeze
Short-covering rally · Short liquidation rally · Squeeze
A chain-reaction price spike: a rise forces short sellers to buy back, through stop-losses or liquidations, and their buying pushes the price higher still.
Simple explanation
Background: Korea's won exchanges offer no futures, so crypto short squeezes mostly play out on overseas futures exchanges; Korean investors feel them through Korean prices and the kimchi premium.
A short position starts by selling first, so closing it means buying back (short covering). When the price rises, shorts lose money. Stop-loss orders from traders who give up, and liquidations of positions that run out of margin, both reach the market as buy orders. That buying lifts the price to the next shorts' stop-losses and liquidation prices, which brings more buying. That loop is a short squeeze.
In crypto most shorts are leveraged futures positions, so squeezes are fast and violent. A 10x short can be liquidated by a rise of roughly 8-10%, depending on the maintenance margin, and a 5x short by roughly 16-20%. When the exchange buys back liquidated shorts at market, the price can jump within minutes. The mirror image, a fall that liquidates crowded longs one after another, is a long squeeze. A short squeeze is one kind of liquidation cascade, but not every cascade is a short squeeze.
Some signs suggest a squeeze is set up. A deeply negative funding rate means shorts are paying longs to keep their bets on; open interest rising while the price is flat or falling can mean shorts are piling up; long/short ratios showing far more short accounts point the same way. When a squeeze fires, a price spike often comes with a sudden drop in open interest. These conditions can also last a long time without any squeeze.
Once the shorts are flushed out, the forced buying stops. The spike is often partly or fully reversed, though the price can hold its new level if something else supports it. Chasing the spike can mean buying at the top, and for short holders, stop-losses are buy orders too, so they feed the squeeze. The higher the leverage, the smaller the rise that knocks a position out.
Stock markets use the same term when short sellers are forced to buy back into a rally. It is most likely in heavily shorted stocks; GameStop in the US in 2021 is the best-known case.
Korean exchanges have no futures, but borrowing coins through an exchange's lending service and selling them is effectively a short: if the price rises, the borrowed coins grow in value against the collateral and the loan can be force-liquidated. A coin whose deposits are closed spiking only in Korea, which Korean traders call gadoori (a "fish pen"), is not a short squeeze, and regulators have caught traders who used such deposit freezes to manipulate prices.
When a short squeeze lifts overseas prices within minutes, Korean prices follow a little later. If overseas prices rise further than Korean ones meanwhile, the kimchi premium shrinks or briefly turns into a reverse premium, then comes back as Korean prices catch up. CoinGaja does not show futures liquidations, but its Kimchi premium by coin page and heatmap show how the gap moves at such moments, and its Whale Trade Radar shows whether large buy orders are hitting the four Korean exchanges.
Example
Bitcoin at $100,000: a 0.1 BTC short (a $10,000 position) at 10x → margin $1,000 (₩1,400,000 at ₩1,400)
Maintenance margin rate 0.5% (assumed) → liquidated when the loss reaches 1,000 − 50 = $950 → a rise of about +9.5%, liquidation price about $109,500
At +5% ($105,000) → loss $500 (50% of the margin) → shorts who give up send stop-loss buy orders
At $109,500 the exchange buys this short back at market (liquidation) → that buying pushes the price toward other shorts' liquidation prices
If overseas prices rise 8% while Korean prices rise only 5% (exchange rate unchanged) → a +1.00% kimchi premium becomes 1.01 × 1.05 ÷ 1.08 − 1 = about -1.81% (a reverse premium)
Fees and funding are left out
※ Example numbers, for illustration only
See it on CoinGaja
Related terms
Comments · ask anything about this term
Comments
No comments yet.