$1.1 billion in short positions were eliminated.

Learning from today's situation: Short Squeeze

With a very simple example, imagine a trader has the following thought:

"The value of Bitcoin will fall."

They open a $100,000 "short" position, often using leverage.

First of all: what is a short sale?

In a very simple and direct way, shorting is betting that the price of an asset will fall. Similarly, long selling is believing that the price will rise.

Imagine that Bitcoin is worth US$100 and you believe it will fall to US$80. Then you short sell:

• You "borrow" 1 BTC.

• You sell this BTC for US$100.

• Bitcoin falls to US$80.

• You buy 1 BTC again for US$80.

• You return the borrowed BTC.

• You make a US$20 profit (before fees).

If Bitcoin rises from US$100 to US$120, you need to buy back the BTC for US$120 to return what you borrowed. In this case, you lose $20.

Returning to our scenario:

If BTC falls, our trader who took the risk wins. But if BTC starts to rise, the opposite happens, somewhat obvious, but that's how it works.

With leverage, a relatively small increase can cause the broker to automatically liquidate the position to prevent the trader from owing money.

And in this scenario, the domino effect occurs:

• BTC rises
• Short positions begin to be liquidated
• Brokers close these short positions
• To close the short position, it is necessary to buy BTC
• More buying pressure
• BTC rises even more
• More short positions are liquidated.

This cycle is precisely what we call a Short Squeeze.

Of course, in this story and example, all this does not mean that someone simply "lost $1.1 billion in money." It means that something close to that value in short positions were leveraged and forcibly closed.

And this is ultimately important because these liquidations end up creating additional demand for Bitcoin.