Short squeeze
Why does a market sometimes rise fastest when betting against it was most comfortable and best paid?
In plain words
A short squeeze is a sharp price rise driven partly by traders holding shorts — bets that a market will fall — being forced to buy back, since buying closes a short. That forced buying adds upward pressure. A negative funding rate means shorts pay longs: traders betting against the market pay those holding longs.
Why it matters
Squeezes can move a market further and faster than new demand alone would justify, because the buying is forced rather than chosen. They often reverse once the covering is done, so the height of the rise says less about lasting demand than its speed suggests.
In a real week: ETH, week of 19 July 2021
In the week of 19 July 2021, ETH rose 15.76%, from 1891.65 to 2189.79, closing at 98.0% of its weekly range. Average eight-hour funding was -0.0006%, dipping to -0.0416%, so shorts were paying longs to stay short. The best day was 21 July at 11.73%. One possible reading is that this pattern of shorts paying, alongside the rise, reflects short covering; ETH was still 49.46% below its 52-week high.
A common mistake
Treating every sharp rise as a squeeze. A squeeze needs crowded short positions and forced buying; funding and open interest data are needed to confirm it.