What is a short

The point is in the nature of the transactions themselves. Long trading is nothing extraordinary. A simple example: you have $70,000, and you buy one bitcoin at a price of $68,700 in the hope that the coin will rise in price to at least $80,000. In general, you can wait as long as you like for this. Thus, the period of time during which the transaction is open, that is, Bitcoin in your hands, can be arbitrarily long. Actually, that’s why it’s called long.

The short is a little more confusing and definitely riskier. When trying to make money by selling, you go for margin trading in advance, that is, trade on credit. Why? Because you are not selling your products. Example:

1 ETH costs $3,750. You think that the price will drop to $3,000, that is, by 20%. Naturally your desire to become richer. But how to do that? If you just buy Ether at $3,750 and it drops to $3,000, you won't gain 20%, you'll lose (and pay a commission). There is a short for this case. You borrow 1 ETH and sell it. Everything went according to your plan: earnings were 20%. In reality, it is a little less, since the commissions for the short are higher than for the long (you will have to pay not only for the transaction, but also for the loan).

Let’s say 1 ETH costs $3,750. It drops in price to $3,000, that is, by 20%. But to grow from $3,000 to $3,750, you need to add 25%. Why? The countdown starts from a smaller amount, although if you look at the absolute value of the change, it’s both $750.

What is a short squeeze

A striking example is the situation with Celcius (CEL) July 2022. It was then that the credit company Celcius Network went bankrupt. That is, fundamental factors spoke in favor of reducing the market value of the CEL coin. This point of view was also shared by investors who shorted this cryptocurrency. Only in reality in the moment everything turned out to be different.

In less than five weeks, the CEL token soared in price by 508.53%, from $0.76 to $4.6. Of course, then everything fell into place, and the cryptocurrency fell to record lows. However, from July to August 2022, all short sellers were dealt a crushing blow.

Source: tradingview.com

At the same time, a number of players make money on short squeezes. In the same CEL story, people who held the coin from mid-July to mid-August 2022 were able to make good money. And it’s not their problem that the short sellers went bankrupt at the same time. Some people lose, some people find.