Insurance Fund

Glossary · Derivatives

An exchange's insurance fund is a pool of capital, built from liquidations closed better than their bankruptcy price, that covers the losses when a liquidation fills worse than bankruptcy. It is the buffer between a bad liquidation and auto-deleveraging, and its size is a measure of how much chaos the venue can absorb.

"It is the exchange's rainy-day jar, filled by other people's liquidations, and when it runs dry the winners start paying for the losers."

When a position is liquidated, the engine closes it in the order book. If it fills better than the bankruptcy price, the remainder goes into the fund; if the market gaps through bankruptcy — a cascade, a thin book at 3am — the fund pays the shortfall. Large venues carry funds in the hundreds of millions of dollars, and the number is public. A fund that shrinks fast during a crash is a venue struggling to close positions cleanly.

Why a trader cares: the fund is what stands between a violent move and auto-deleveraging of profitable accounts on the other side. On a small venue with a thin fund, a winning position is not fully yours until the other side's liquidations have cleared. Prefer the deepest fund when trading illiquid perps with leverage, and read a sudden fund drawdown as a warning that the next cascade may be socialised.

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Questions

What is Insurance Fund in crypto trading?

An exchange's insurance fund is a pool of capital, built from liquidations closed better than their bankruptcy price, that covers the losses when a liquidation fills worse than bankruptcy. It is the buffer between a bad liquidation and auto-deleveraging, and its size is a measure of how much chaos the venue can absorb.

How would a trader say it?

It is the exchange's rainy-day jar, filled by other people's liquidations, and when it runs dry the winners start paying for the losers.

Part of the Crypto Jargon glossary — every term, decoded the way a trader would say it.

Crypto Jargon

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