Supply squeezes in crypto markets occur when a sudden and significant reduction in the available circulating supply of a digital asset coincides with strong demand, leading to rapid and sharp price increases. This condition arises from various factors that restrict the quantity of assets available for purchase, amplifying the impact of buying pressure.
Mechanism
This phenomenon can be triggered by large-scale staking or locking of tokens in DeFi protocols, substantial institutional accumulation that removes assets from liquid exchanges, or a low float due to widespread long-term holding. As available supply diminishes, even moderate buying pressure can overwhelm the order book, forcing prices higher as buyers compete for scarce assets. Exchange reserves often deplete during such events.
Methodology
Identifying potential supply squeezes involves monitoring on-chain metrics like exchange reserves, staking ratios, and whale accumulation patterns. Analysts also track tokenomics, vesting schedules, and protocol upgrades that might reduce future circulating supply. Investors employ strategies to identify assets with tightening supply conditions, often taking long positions in anticipation of price surges, while managing the inherent volatility and risk associated with such market events.
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