Definition
A short squeeze is a market event where the price of an asset rises sharply as traders holding short positions are pressured to buy back the asset, intensifying upward momentum. It typically occurs when a heavily shorted asset moves against short sellers, triggering liquidations or forced exits that convert short exposure into concentrated buy orders. In crypto markets, short squeezes are often visible in derivatives such as futures and perpetual futures, where leverage and automatic liquidation mechanisms can amplify the effect. The phenomenon is closely watched by traders because it can produce extreme, fast-moving price spikes that deviate from recent trading ranges.
Context and Usage
In derivatives-based crypto trading, a short squeeze is often associated with elevated open interest and imbalanced positioning, where a large share of contracts are short. When price starts to move higher, funding rate dynamics in perpetual futures and liquidation cascades can accelerate the squeeze as more short positions are closed at market. This process can temporarily increase volatility well beyond typical levels, as both forced buyers and opportunistic traders add to the upward pressure. Market participants use the term short squeeze to describe not just the price pattern, but also the positioning backdrop and mechanical feedback loop that drives the sudden move.