On August 13, 2025, Ethereum saw a massive rally that forced the liquidation of over $250 million in short positions within just 24 hours, representing almost half of all crypto futures liquidations for the day. This extraordinary event was not only a theatrical market moment but also reflected deeper structural trends within the Ethereum ecosystem.
Underlying this price surge and liquidation wave is compelling on-chain evidence showing how the actual supply dynamics on exchanges contributed to the rally. Data from Ethereum inflow/outflow charts reveals significant net outflows of ETH from centralized exchanges during the rally period.
Source: CoinGlass
Large outflows (where traders move ETH off exchanges into private wallets) typically indicate buying confidence and reduced immediate selling pressure. As ETH is withdrawn, less supply remains on exchanges for traders to sell, intensifying upward price momentum. This effect, combined with strong institutional buying and ETF inflows, created the ideal conditions for those betting against Ethereum (short sellers) to face mounting losses and forced position closures.
The 2025 ETH Rally and the Short Squeeze
Ethereum price rocketed by nearly 8% in a single day, after weeks of institutional inflows and optimism around ETF adoption. The momentum was already building: ETH is up 57% over the past month, vastly outpacing many other major crypto assets.
Source: CoinMarketCap
As ETH climbed past crucial resistance levels, a wave of forced liquidations hit traders betting against the coin. According to on-chain derivatives data, the value of closed short positions crossed $250 million in 24 hours which is almost half of all crypto futures liquidations for the day. Some exchanges reported more than $135 million in short liquidations in a single hour as ETH broke past the $4,600 mark.
What Is a Short Position (and Why Take One)?
A short position in crypto (or traditional finance) is essentially a bet that the price of an asset will fall. Here’s how it works in practice:
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A trader borrows ETH and sells it, hoping to buy it back later at a lower price to return to the lender, pocketing the difference as profit.
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If the price drops as expected, the trader profits.
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If the price rises instead, the loss can be potentially unlimited since the asset must be bought back at even higher prices.
Short selling is a popular strategy for hedging risk or speculating on falling prices, but its risks are significant. The maximum gain is capped (the asset can only drop to zero), but the potential loss is unlimited if the price spikes.
How Do Liquidations and Short Squeezes Work in Crypto?
Many shorts use leverage which is borrowing funds to increase buying power and potential profits. But when ETH’s price surges, those borrowed positions can quickly go underwater. If a price threshold (the liquidation price) is breached, exchanges will automatically buy back the ETH to limit their exposure and return collateral to the lender.
This process is called liquidation. When liquidations stack up – a “short squeeze” – the resulting buy orders accelerate price increases, forcing more shorts to close out and generating a rapid upward spiral in prices.
Key Drivers Behind this Short Squeeze
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Institutional buying: ETH ETFs and on-chain data show surging inflows from asset managers and treasuries, a “wall of money” that overwhelmed bearish sentiment.
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Regulatory clarity: Fresh pro-crypto policies and easing US regulatory concerns have shifted both capital and sentiment toward ETH.
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Technical breakout: Once ETH crossed $4,600, cascading liquidations and momentum-focused traders exacerbated the price action.
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Market structure: With high leverage and open shorts, it only took a moderately sharp price move to trigger a chain reaction on major derivatives platforms.
Lessons for Traders Moving Forward
Ethereum’s $250 million short squeeze is a powerful reminder of how quickly crypto markets can turn and how leverage and sentiment can amplify moves.
Understanding on-chain signals like exchange outflows, coupled with awareness of open interest and liquidation levels in derivatives markets, can help traders anticipate such moves before they unfold.
Events like this underscore two things:
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Opportunity: Squeezes can present high-reward moves for those positioned early.
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Risk: Traders on the wrong side face devastating losses, especially when using leverage.
In high-volatility markets like crypto, the smartest players treat capital preservation as seriously as profit-making.
Frequently Asked Questions
1. What is a short squeeze?
A short squeeze occurs when the price of an asset, such as Ethereum, rises sharply, causing traders who bet that the price would fall (“short sellers”) to close their positions by buying the asset. This forced buying adds more upward pressure on the price, creating a feedback loop that can rapidly accelerate price increases. It happens when many short positions must be covered quickly, “squeezing” out the sellers.
2. What does it mean to have a short position in crypto?
A short position means you are betting that the price of a cryptocurrency will decline.
3. How does leverage affect short selling?
Leverage allows traders to borrow funds to increase the size of their position beyond their own capital. While leverage can amplify profits if the trade goes well, it also increases risk.
4. How do ETH inflows and outflows on exchanges relate to price movements?
When traders move ETH off exchanges into private wallets (outflows), it usually signals buying confidence and reduces the supply of ETH available to sell, supporting upward price pressure. Conversely, inflows to exchanges can indicate potential selling pressure. Recent large ETH outflows helped intensify the rally that triggered the short squeeze.
6. What risks do traders face during a short squeeze?
In a short squeeze, traders holding short positions face potentially unlimited losses if the asset price spikes. High leverage can amplify these losses, and sudden liquidations can cause rapid price swings. Proper risk management and understanding of market dynamics are critical.
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About the Author: Tyler Chen
