XRP reached an extraordinary 170% rally in 2021, what triggers might have catalyzed the surge in XRP price? What is really behind XRP’s recent 170% rally? According to key metrics, there's more to the XRP pumps than just short-seller liquidations. Mentioning this, what we have to mention is a short squeeze. What's a short squeeze and how does a short squeeze work? Let's delve into these questions.
What's a short squeeze?
A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradable security. It occurs when a security has a significant amount of short sellers, meaning lots of investors are betting on its price falling. The short squeeze begins when the price jumps higher unexpectedly and gains momentum as a significant measure of the short sellers deciding to cut losses and exit their positions.
How Does a Short Squeeze Work?
When a heavily shorted stock unexpectedly rises in price, the short sellers may have to act fast to limit their losses. Short sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall. If they’re right, they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position. If they’re wrong, they’re forced to buy at a higher price and pay the difference between the price they set and its sale price.
Because short sellers exit their positions with buy orders, the coincidental exit of these short sellers pushes prices higher. The continued rapid rise in price also attracts buyers to the security. The combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented.
Hope this article can help you get a better understanding of what's a short squeeze and how a short squeeze work.
