What causes a short squeeze?

Shorts that have to buy

A short squeeze happens when holders of short positions are forced to buy back, and their buying lifts the price far enough to force more of them to do the same. Closing a short is a buy, so the exit and the cause are the same order, which is why the move can go further and faster than the news behind it.

None of that is particular to Hyperliquid, or to crypto. What is particular is the machinery that decides when a short has to buy, and that machinery is documented.

What forces the buying

Three things end a short against its holder's will, and only the first two are automatic.

1. Liquidation. A position is liquidated when the account's equity falls below the maintenance margin, which Hyperliquid sets at half the initial margin at max leverage, from 1.25% to 16.7% by asset. It is worked through the same order book as everyone else's orders, and a large position is liquidated in slices.
2. A stop order. A stop to buy, placed by the holder, becomes an ordinary order on the same book when it triggers. Many stops left near the same round number are many buys at the same moment, and nothing coordinates them except the number.
3. A decision taken in a hurry. Not automatic, not measurable, and not absent. It arrives alongside the first two and cannot be separated from them afterwards.

There is a limit to how far that can feed the move. If equity drops below two thirds of the maintenance margin without a successful liquidation through the book, the position is transferred to the liquidator vault, a component strategy of HLP. That takes it off the book rather than putting more buying into it.

The ingredients

A squeeze needs something to squeeze. Three conditions are usually described together, and each has a public figure that touches it without proving it.

• Shorts that are crowded and leveraged. No public figure says this. Open interest counts contracts still open and every contract is one long and one short, so the crowd is never named in the data.
• Negative funding. When the perpetual trades under its index, funding turns negative and shorts pay longs every hour. A side that is paying has a running cost and a reason to close, and the rate is published hour by hour.
• Open interest rising beforehand. Contracts were being opened while the price moved. The side is not in the figure, but a market with little open interest has little to force, and one whose open interest has been climbing has more.

Depth is the fourth ingredient, and the quietest: the same forced buying moves a thin book much further than a deep one. Hyperliquid caps a single market order at 30,000,000 dollars where max leverage is 25 or more, down to 500,000 at the low end, which splits a very large order but does not make a thin book deep.

Why it ends, and why it is named afterwards

A squeeze ends when the forced buying runs out. The leveraged shorts that could be liquidated have been, the stops that were going to trigger have triggered, and what is left is ordinary trading at a price that forced buying made. Nobody is obliged to hold it there, which is why much of the move is often given back.

Every condition on this page can be present and nothing happens. They describe a market that could be squeezed, not one that will be, and the word is applied after the fact to a move that has already happened. This page explains the mechanism; what the public data shows before and during one is a separate question, and a separate page.