Foresight Ventures: How to profit from the altcoin short squeeze?

Original 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 short-term demand in the market far exceeds the circulation, and when the price is raised due to insufficient supply, it may trigger a short squeeze transaction. 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 squeezes are more likely to occur on altcoins with small market caps 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. Funding rate of the contract: **The premise of a short squeeze is that the short positions are overwhelmingly more than the long positions. The specific manifestation is that when the contract funding rate of a certain altcoin exceeds -0.1%; (that is, the short daily interest rate; 0.3%;, the annualized interest rate exceeds; 100%;), it means that the short-term short-term sentiment is relatively extreme, exceeding - 0.75%; will accelerate the rise. 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 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, the contract position should increase in the short term; above 50%, 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. 5; At the end of the month, the stable currency "LUSD" will be pledged, and the pledge ratio will be as high as 22%;. Stablecoin; LUSD and; BUSD; group pair; LP mining token; LINA; yield as high as; 60%;, attracting the expected; 10%; proportion of hedge mining. The main force of the market enters the market to buy 23% of the circulation, so the 22% pledged and 23% controlled by the banker, 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 LINA;'s contract funding rate has greatly exceeded -0.1% from; 5; month; 28; -2%; the top funding rate. Contract positions also began to rise sharply from May 28, and the position volume was $50 million; at this time, the market value in circulation was only $70 million; the contract volume was $50 million, which was close to the spot trading volume; 9,000; million US dollars; 50%;, it is easy to cause short positions to be short-supplied. As a result, on May 28th, on June 3rd, the price of LINA quickly increased 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 been completed recently, and the second phase of the test network test is carried out. The main network is expected to be launched soon. Market Maker; 4; Yuexin Replacement; DWF, 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;, and although there have been twists and turns in the middle, the high rate has continued until May;16; , the extreme value was once as high as -1%;. More importantly, the contract position has risen sharply since May 12, and the open interest has reached 30 million US dollars, which is close to the circulating market value of 40 million US dollars. Contract volume; 30 million; million US dollars, close to spot trading volume; 70 million; million US dollars; 50%;. As a result, the "ARPA" short-squeeze market rose rapidly by "3-4" times within two weeks.

**3. MTL: **Metal; is an encrypted asset payment platform with user incentives, and is an old project in 2017. The main force in the market controls about 10% of the circulating disk, and the trading volume on the Korean exchange "Upbit" is very exaggerated recently.

We can observe that the contract funding rate of MTL; was abnormal on the 5; month; 6; day, but the short squeeze ended too soon. Then on June 6, there was an abnormality again, and the extreme value of -1.8% was once reached in the later period. More importantly, the contract position has risen sharply since June 6, and the position is 60 million US dollars, which is very close to the circulating market value of 80 million US dollars. Contract volume; 80 million; million US dollars, close to the spot volume; 160; million US dollars; 50%;. This wave of short-squeeze market; MTL; rose; 2-3; times 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. , which will not be repeated here.

4. The risk of short squeeze trading

***Each coin has two sides, and there is some uncertainty in short squeeze trading. ***

**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, on the 6th; month; 3rd; day temporary adjustment; LINAUSDT; leverage and margin ladder; 6; month; 7; day temporary adjustment; MTLUSDT; Change the rules at any time" is a strong warning signal, which means don't let our exchange take the blame because you want to 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 the king of altcoins; ETH; Judging 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. However, if the "4" hour amplitude exceeds "20%", stop profit is also required. In general, short squeezes favor technical patterns over fundamental events, which tend to lead to losses for some retail investors.

About Foresight Ventures

Foresight Ventures bets on the innovation process of cryptocurrency in the next few decades, and manages multiple funds under its management: VC; fund, secondary active management fund, multi-strategy; FOF, special purpose; S; fund "Foresight Secondary Fund l", total assets The scale of management exceeds; 4; million US dollars. Foresight Ventures adheres to the concept of "Unique, Independent, Aggressive, Long-term", and provides extensive support for projects through strong ecological forces. Its team comes from senior personnel from top financial and technology companies including Sequoia China, CICC, Google, Bitmain, etc.

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**Disclaimer: Foresight Ventures; all articles are not intended as investment advice. Investment is risky, please assess your personal risk tolerance and make investment decisions prudently. **