Insurance fund
An insurance fund is an exchange reserve that covers losses from liquidations that could not be closed at the bankruptcy price. It protects winning traders from being underpaid.
How it works
When a position is liquidated, the exchange tries to close it before the loss exceeds the margin (the bankruptcy price is the level where margin hits zero). If the liquidation fills better than that, the leftover margin usually goes to the insurance fund. That is how the fund grows.
If the market moves violently and the position is closed worse than the bankruptcy price, a hole appears: the loss is bigger than the margin. The insurance fund fills it so traders on the other side receive their profit in full.
Many exchanges publish their insurance fund balance. If the fund runs short, auto-deleveraging kicks in and profitable positions on the other side are reduced by force. A large, growing fund is therefore a sign of a sturdier venue.
A trader held a $50,000 long with $2,500 margin (20x). In a crash, the position was closed at a price equal to a $2,700 loss. That is $200 more than the margin, and the insurance fund covers it. Had it closed at a $2,400 loss, the remaining $100 would have gone into the fund.
A common mistake is thinking the insurance fund protects you from your own losses or liquidation. It does not: it covers holes left by other people's liquidations so the system stays solvent. Your margin is still gone if you are liquidated.
Questions and answers
What is an exchange insurance fund in simple terms?
It is a pool of exchange money that covers liquidation losses when a liquidated trader's margin was not enough.
Where does insurance fund money come from?
Mostly from leftover margin of liquidated positions that were closed better than the bankruptcy price.
Does the insurance fund protect my money?
It protects the profits of traders on the other side from being underpaid. It does not give back your own margin if you are liquidated.
Related terms
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Updated: 2026-10-19