Definition ∞ Short squeeze risk is the potential for a rapid and sharp increase in an asset’s price, forcing traders who bet on its decline to buy back their positions. This situation occurs when a heavily shorted asset experiences positive news or increased buying interest, causing its price to rise unexpectedly. As the price climbs, short sellers face mounting losses and are compelled to purchase the asset to cover their positions, further accelerating the price surge. This creates a feedback loop that can lead to significant price volatility.
Context ∞ Cryptocurrency news often highlights short squeeze risk when discussing assets with high open interest in short positions or after unexpected positive market developments. Traders closely monitor funding rates and short interest data to identify assets susceptible to such events. Understanding this risk is crucial for participants in derivatives markets and for assessing potential rapid price movements.
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