A short squeeze can be described as an event where the price of an asset like a stock or cryptocurrency experiences a sudden spike forcing the traders who had taken a short position to cover it by buying back at a price they would not have imagined. The traders who take the risk of betting against the asset and are commonly referred to as “short sellers” do it by borrowing the asset and selling it to the market. Aided by their assumption, they will later buy it back at a lower price ($) with the difference being their profit.
Nevertheless, if the price starts to go up the shorts will lose their bets. As the price goes up slowly but surely, a lot of short sellers will try to cover by buying the asset and closing their positions, thus limiting their losses. This sudden group of buying adds even more pressure on price to go up and the price rise happens faster. It is the quick price change that causes the “squeeze.”
A short squeeze can be considered as a typical scenario when an asset has a high level of short interest which means that the price is driven up by positive news or strong buying demand that surprised the conventional view. The crypto market is the most affected with such situations since it is operating all the time and can be easily swayed by emotions, liquidity changes or large whale trades.
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