How to Profit from an Altcoin Short Squeeze?

Author: Jonas @Foresight Ventures

**1. What is a short squeeze? **

Going short allows traders to profit from falling asset prices. This is a common way of hedging existing positions or bearish market moves. But short trading can sometimes involve high risks. **First of all, when buying orders suddenly increase and a large number of short sellers are forced to close their positions and continue to buy assets, the demand in the market in a short period of time far exceeds the circulation, and when the price is raised due to insufficient supply, it may cause a short squeeze trade. Secondly, when a manipulative group absorbs and concentrates the circulation plate, so that short sellers in the market have no other source to buy back chips except this group, it will also trigger a manipulative short squeeze. **

**Short squeeze transactions are more likely to occur on altcoins with small market capitalization or inactive transactions. Especially in the crypto market that uses high leverage, the continuous forced liquidation will lead to a waterfall effect, and the price changes will be more drastic. Some advanced traders watch for potential short squeezes, accumulating positions at early start-ups, and taking advantage of rapid price increases to sell. **

2. Several key indicators of short squeeze trading

**1. The funding rate of the contract: the premise of a short squeeze is that the short positions overwhelmingly outnumber the long positions. **The specific form of expression 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 annualized interest rate exceeds 100%), it means that the short-term short-term sentiment is extreme, and it is more than -0.75% will accelerate. In the following discussion cases, extreme negative funding rates have been seen.

**2. Contract positions: More importantly, the more liquidity that 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 market value of circulation, and the closer the contract trading volume is to 50% of the spot trading volume, the easier it is to short-squeeze. Secondly, the contract position should increase by more than 50% in the short term, indicating that the main funds are entering the market. If the open interest drops, it means that the main funds are retreating, and it is necessary to take profits at this time.

**3. Chip distribution: **Suitable for market makers to conduct a manipulative short squeeze. The more concentrated the chip structure is, the more extreme the market volatility will be.

3. Analysis of several recent classic cases

**1. LINA:****Linear is a cross-chain compatible defi synthetic asset protocol, and its fundamentals are lackluster. **At the end of May, the stable currency LUSD was pledged, and the pledge ratio was as high as 22% of the circulation. The stable currency LUSD and BUSD group has a yield of 60% for the LP mining token LINA, attracting an estimated 10% ratio of hedged mining. The main force of the market buys 23% of the circulating supply, so 22% of the pledge plus 23% of the bookmaker's control, a total of about 50% of the LINA chips are locked. This is a very typical manipulative short squeeze, the dealer holds the spot manipulation contract.

We can observe that the contract funding rate of LINA has greatly exceeded -0.1% since May 28, and reached the highest funding rate of -2% on May 31 and June 3. The contract position has also increased sharply since May 28, with a position of 50 million US dollars, while the circulating market value at this time is only 70 million US dollars; the contract trading volume is 50 million US dollars, which is close to 50% of the spot trading volume of 90 million US dollars, which can easily lead to short positions To close a position where supply exceeds demand. Therefore, during the week from May 28 to June 3, the price of LINA currency rose rapidly by 2–3 times.

**2. ARPA: ARPA network is a decentralized secure computing network, and it is a privacy public chain in 2018. **The construction of the random number generator has recently been completed, and the second phase of the test network test is carried out. The main network is expected to be launched soon. The market maker was replaced by DWF in April, and DWF has been on the market for other encryption projects many times in history.

We can observe that ARPA’s contract funding rate has greatly exceeded -0.1% since May 12. Although there were twists and turns in the middle, the high rate continued until May 16, and the extreme value was as high as -1%. What's more important is the contract position, which has risen sharply since May 12, and the open interest is 30 million US dollars, which is close to the circulating market value of 40 million US dollars. The contract turnover was US$30 million, nearly 50% of the spot turnover of US$70 million. As a result, ARPA's short-squeeze market quickly rose 3-4 times within two weeks.

**3. MTL: Metal is an encrypted 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 market, and the trading volume on the Korean exchange Upbit has been exaggerated recently.

We can observe that MTL's contract funding rate was abnormal on May 6, but the short squeeze ended one day too soon. Then there was an abnormality again on June 6, and it reached an extreme value of -1.8% in the later period. More importantly, since June 6, the contract open interest has risen sharply, and the open interest is 60 million US dollars, which is very close to the circulating market value of 80 million US dollars. The contract turnover was US$80 million, nearly 50% of the spot turnover of US$160 million. This short squeeze saw MTL go up 2–3x within a week.

Coincidentally, last year's LEVER, BEL and other small-cap altcoins also experienced similar short-squeeze tactics, such as high funding rates, high contract-to-spot position ratios, high contract-to-spot transaction ratios, and sudden surges in positions, etc., here I won't repeat them one by one.

4. The risk of short squeeze trading

Every coin has a pros and cons, and there is a certain degree of uncertainty in ** short squeezes. **

**1. Encrypted exchanges will temporarily modify the rules. **If the default position limit increases, it will be bullish; if the default position limit decreases, it will be negative. For example, Binance Exchange temporarily adjusted LINAUSDT leverage and margin tiers on June 3, and temporarily adjusted MTLUSDT leverage and margin tiers on June 7, both of which are strong warning signals that "we have to change the rules at any time", meaning Don't let us exchange the pot just because you make money.

**2. Subsequent value return of altcoins. **While there are a lot of altcoins that have moved higher after the short squeeze, it is more often that these altcoins that were heavily shorted continue to fall as prices soar. There is a commonly used indicator for peaking, which is the comparison between the trading volume of the altcoin spot (or contract) and the trading volume of ETH, the king of altcoins. From historical data, once the trading volume of the altcoin spot (or contract) exceeds or approaches ETH, there is a high probability that it will be the top of the short-term sentiment. And the 4-hour amplitude exceeds 20% also needs to take profit. In general, short squeezes favor technical patterns over fundamental events, which tend to lead to losses for some retail investors