1. What is a short squeeze?

Short selling allows traders to profit from falling asset prices. It is a common way to hedge existing positions or bearish market conditions. However, short selling can sometimes be very risky. First, when buying suddenly increases, a large number of short sellers are forced to close their positions and continue to buy assets. In a short period of time, the market demand far exceeds the circulation, and the price is pushed up due to insufficient supply, which may trigger a short squeeze. Secondly, when a manipulative group absorbs and concentrates the circulation, so that short sellers in the market have no other source to buy back their chips except this group, it will also trigger a manipulative short squeeze.

Short squeeze transactions are more likely to occur in altcoins with small market capitalization or inactive transactions. Especially in the crypto market that uses high leverage, continuous forced liquidation will lead to a waterfall effect and price changes will be more dramatic. Some advanced traders will watch for potential short squeeze opportunities, accumulate positions in the early stages of the launch, and sell when prices rise quickly.

2. Several key indicators of short squeeze trading

1. The funding rate of the contract: The premise for a short squeeze to occur is that short positions overwhelmingly outnumber long positions. The specific manifestation is that when the contract funding rate of a certain altcoin exceeds -0.1% (that is, the daily short interest rate is 0.3% and the annual interest rate exceeds 100%), it means that the short-term short sentiment is extreme, and it will accelerate if it exceeds -0.75%. rise. The following cases discussed all saw the emergence of extreme negative funding rates.

2. Contract positions: More importantly, the more liquidity is trapped, the greater the volatility caused by the short squeeze. It is mainly reflected in two aspects. First, the closer the contract position is to the circulating market value and the closer the contract trading volume is to 50% of the spot trading volume, the easier it is for a short squeeze to occur. Secondly, if the contract position increases by more than 50% in the short term, it means that the main funds are entering the market. If the position decreases, it means that the main funds are retreating, and profits need to be taken at this time.

3. Chip distribution: It is suitable for bankers to conduct manipulative short squeezes. The more concentrated the chip structure is, the more extreme the market fluctuations will be.

3. Analysis of several recent classic cases

1. LINA: Linear is a cross-chain compatible defi-like synthetic asset protocol, but its fundamentals are lackluster. At the end of May, staking began to mint the stablecoin LUSD, with the staking ratio reaching 22% of the circulation. The stablecoin LUSD and BUSD groups have a yield of up to 60% on the LP mining token LINA, attracting an estimated 10% proportion of hedging mining. The main force in the market enters the market and buys 23% of the circulating supply. As a result, the 22% pledged plus the 23% controlled by the dealer, a total of about 50% of the LINA chips are locked. This is a very typical manipulative short squeeze, where the dealer holds the spot manipulation contract.

We can observe that LINA’s contract funding rate has significantly exceeded -0.1% since May 28, reaching a maximum funding rate of -2% on May 31 and June 3. Contract positions have also risen sharply since May 28, with positions of 50 million US dollars, while the circulating market value at this time was only 70 million US dollars; contract trading volume was 50 million US dollars, close to 50% of the spot trading volume of 90 million US dollars, which could easily trigger short positions Close positions when supply exceeds demand. As a result, in the week from May 28th to June 3rd, the price of LINA currency rose rapidly by 2-3 times.

2. ARPA: The ARPA network is a decentralized secure computing network and a privacy public chain in 2018. The construction of the random number generator has recently been completed and the second phase of testnet testing has been carried out. The mainnet is expected to be launched soon. The market maker was newly changed to DWF in April. DWF has historically been the market maker of other crypto projects many times.

We can observe that ARPA’s contract funding rate has significantly exceeded -0.1% since May 12. Although there were twists and turns in the middle, the high rate continued until May 16, with the extreme value once being as high as -1%. More importantly, contract positions have risen sharply since May 12, reaching US$30 million, which is close to the circulating market value of US$40 million. Contract volume was $30 million, nearly 50% of spot volume of $70 million. As a result, ARPA’s short squeeze market quickly increased 3-4 times within two weeks.

3. MTL: Metal is a crypto asset payment platform with user incentives. It is an old project in 2017. The main players in the market control about 10% of the circulating orders, and the recent trading volume on the Korean trading platform Upbit has been exaggerated.

We can observe that MTL’s contract funding rate became abnormal on May 6, but the short squeeze ended one day too quickly. Then there was another anomaly on June 6, with an extreme value of -1.8% in the later period. More importantly, contract positions have risen sharply since June 6, reaching US$60 million, which is very close to the circulating market value of US$80 million. Contract volume was $80 million, nearly 50% of spot volume of $160 million. This short squeeze saw MTL rise 2–3x in a week’s time.

Coincidentally, small-market altcoins such as LEVER and BEL last year also experienced similar short-squeezing techniques, such as high funding rates, high contract-to-spot ratio, high contract-to-spot trading ratio, sudden surge in positions, etc. Here I won’t go into details one by one.

4. Risks of Short Squeeze Trading

Every coin has two sides, and there is a certain amount of uncertainty involved in short squeeze trading.

1. The encryption trading platform will temporarily modify the rules. If the default position limit increases, it is a good thing; if the default position limit decreases, it is a bad thing. For example, the Binance trading platform temporarily adjusted the LINAUSDT leverage and margin tiers on June 3, and the MTLUSDT leverage and margin tiers on June 7. This is a strong warning signal that "we have to change the rules at any time." It means don't Thinking about making money for you, let our trading platform take the blame.

2. The subsequent value return of altcoins. While many altcoins have moved higher following a short squeeze, more often than not, these heavily shorted altcoins have continued to fall as prices soared. There is a commonly used peaking indicator, which is the comparison of the altcoin spot (or contract) trading volume and the altcoin king ETH trading volume. Judging from historical data, once the altcoin spot (or contract) trading volume exceeds or approaches ETH, there is a high probability that it will be the top of short-term sentiment. If the 4-hour amplitude exceeds 20%, a profit stop is also required. In general, short squeezes favor technical patterns rather than fundamental events, often resulting in losses for some retail investors