What Is Insurance Fund?
An insurance fund is a reserve pool maintained by derivatives exchanges to cover losses when liquidated positions can't be closed at a positive equity level. When a trader's position is liquidated and the realized loss exceeds their deposited margin (bankruptcy), the insurance fund covers the deficit. Without it, the loss would be socialized across profitable traders.
How Insurance Fund Works
Insurance funds grow when liquidations execute at prices better than the bankruptcy price — the surplus is added to the fund. They shrink when liquidations execute at prices worse than bankruptcy. Major exchanges like Binance and Bybit maintain insurance funds worth hundreds of millions of dollars. The fund size is a measure of exchange financial health.
Why It Matters for Traders
The size and management of the insurance fund should factor into exchange selection for leveraged trading. A large, well-funded insurance fund means socialized losses (auto-deleveraging or clawbacks) are less likely. During extreme volatility events, underfunded insurance pools can result in ADL — your profitable position getting forcibly closed to cover someone else's losses.