Introduction to Insurance Fund

What Are Insurance Funds?

Futures Insurance Funds are protective mechanisms established to mitigate the impact of liquidations. It is designed to protect traders from incurring excessive losses in derivatives trading. They help shield traders from adverse losses caused by bankrupt positions and ensure that profits from in-the-money positions are fully distributed to eligible traders.

When a trader’s position is liquidated, and the closing price is better than the bankruptcy price, any remaining margin from that position is transferred into the insurance fund. Conversely, if the closing price is worse than the bankruptcy price, causing the position’s losses to exceed the trader’s initial margin, the shortfall is absorbed by the insurance fund. This mechanism helps ensure market stability and safeguards traders from undue counterparty risk.

User Protection Via Insurance Mechanisms

Users can trade futures on BitKan with confidence, knowing that their positions are protected by an insurance fund. As a crypto broker for partner exchanges such as Binance, the insurance fund for BitKan traders is directly sourced from these partners. This ensures that the protections and safeguards available to BitKan users are supported by the robust insurance mechanisms of exchanges like Binance, providing the same level of risk mitigation and coverage as trading directly on the partner platforms.

These insurance funds serve as a safety net for users’ assets, offering an additional layer of protection. The insurance policies of our partner exchanges are transparent and well-structured, with clearly defined coverage limits, eligible assets, risk parameters, and regulatory compliance—all carefully designed to safeguard traders’ interests. Our partner exchange, Binance, manages multiple Futures Insurance Funds, with assets held across one or more wallets. Each fund’s coverage is specifically calibrated by Binance and allocated to address losses associated with its designated categories of futures contracts. Users can view the balance of Futures Insurance Funds (in USDT or USDC) at any time by visiting the Insurance Fund History page.

Despite the term “insurance,” these funds are not insurance products, and BitKan does not operate as an insurer. The Futures Insurance Funds are intended solely to reduce counterparty risks resulting from futures liquidations. They do not provide guaranteed protection against losses, and users should not rely on them as a substitute for independent risk management practices.

How Do Futures Insurance Funds Work?

A trader’s position is subject to liquidation if the collateral provided falls below the margin required to maintain the position. If, after liquidation, the collateral balance becomes negative or the position cannot be liquidated, it is deemed a Bankrupt Position. In such cases, the Futures Insurance Funds may assume the Bankrupt Position. Losses incurred from the position are absorbed by the relevant fund, while any profits (if realized) are credited back into the same fund.

If the unrealized losses of Bankrupt Positions taken over by the liquidation engine exceed the available balance of the relevant Futures Insurance Fund, the liquidation engine can no longer trade that contract type. At that point, the Auto-Deleveraging (ADL) mechanism is triggered to manage risk.

It is important to note that Futures Insurance Funds are not designed to reimburse traders for their losses. Their sole purpose is to cover the shortfall between the bankruptcy price and the actual execution price of a liquidation order. Traders should not expect to recover personal losses through these funds.

Example

Consider a trader holding a long BTCUSDT position in isolated margin mode. The liquidation price is set at 65,000 USDT, while the bankruptcy price is 64,000 USDT. When the mark price reaches 65,000 USDT, the position is liquidated and settled at the bankruptcy price of 64,000 USDT, regardless of the prevailing market price.

However, the actual execution price depends on market conditions at the time of liquidation:
-- If the execution price is higher than the bankruptcy price (e.g., 64,980 USDT), the surplus margin is transferred to the Insurance Fund.

-- If the execution price is lower than the bankruptcy price (e.g., 63,950 USDT), the Insurance Fund absorbs the excess loss beyond the trader’s initial margin.

This process ensures that counterparty risks are managed and that profitable traders receive their full payouts.

How the Minimum Size of Each Futures Insurance Fund is Determined

The minimum required size of each Futures Insurance Fund is calibrated to ensure sufficient coverage for losses arising from Bankrupt Positions within its designated category of futures contracts. The methodology aligns with practices commonly adopted in traditional financial futures markets and expected by their regulators.

This calculation is based on a 99.9% confidence interval, incorporating historical stressed scenarios that reflect extreme yet plausible market conditions. It is important to note, however, that this 99.9% confidence interval does not relate to the activation of Auto-Deleveraging (ADL) and should not be interpreted as a guarantee that ADL will be avoided in 99.9% of liquidation scenarios.

How Futures Insurance Funds Are Funded and Maintained

When a position is liquidated, a portion of the trader’s collateral is deducted as a Liquidation Clearance Fee, unless the position becomes a Bankrupt Position after liquidation. If the Futures Insurance Fund assumes a Bankrupt Position, any profit generated from that position will be credited back to the relevant fund.

The size of each Futures Insurance Fund is monitored on a regular basis. If a fund falls below its required minimum level, additional assets will be contributed to restore it. Where necessary, there will also be a rebalance of assets between different Futures Insurance Funds to ensure that each maintains at least the required minimum size.

Conclusion

Cryptocurrency markets are highly volatile, with prices often experiencing sharp swings during events such as bull runs or market crashes. In these conditions, traders may face liquidation scenarios where losses exceed their available margin. Insurance fund reserves act as a safeguard, covering these excess losses to ensure smoother liquidation processes and reduce systemic risks.

Beyond protecting individual traders, insurance funds play a broader role in maintaining market health. They help stabilize the market by minimizing the impact of large liquidation losses and foster investor confidence by providing a reliable safety net, encouraging greater participation in the trading ecosystem. As the digital asset market matures, the need for transparency and effective reserve management will become increasingly important—serving as a cornerstone for both investor protection and long-term industry growth.

Disclaimer

Cryptocurrency trading involves significant risk and can result in substantial or total losses. Please participate in trading only after fully understanding the risks, as outlined on BitKan and its partner exchanges’ official announcement pages. Prices of digital assets are highly volatile, and the value of your investment may rise or fall. You are solely responsible for your investment decisions, and BitKan is not liable for any losses incurred. Past performance is not indicative of future results. You should carefully consider your investment experience, financial situation, investment objectives and risk tolerance and consult an independent financial adviser prior to making any investment.