What Is a ‘Short Squeeze’ and How Can Funding Rates Contribute to It?

A short squeeze occurs when the price of an asset rapidly increases, forcing short sellers to buy back the asset to cover their positions, which in turn drives the price even higher. High positive funding rates can contribute to a short squeeze by making it expensive to maintain a short position.

Traders may close their shorts to avoid high funding costs, reducing the supply of sellers and making the market more susceptible to a rapid price surge.