Crypto futures are characterized by high risk and volatility. In extreme market conditions, futures users may experience liquidation or even bankruptcy. When bankruptcy occurs, the amount of loss incurred by traders may exceed the margin in their accounts. At this point, the insurance fund becomes a safety net for investors, protecting their interests.
Both liquidation and bankruptcy have similar definitions, but the consequences of bankruptcy are more severe. Liquidation occurs when a user's position incurs losses, and the remaining margin in the position falls below the maintenance margin. The system will automatically close the position to safeguard the interests of the trading platform and other users.
Bankruptcy happens when the system takes over a liquidation position and closes it, but due to drastic market fluctuations, the final closing price is less than the bankruptcy price (meaning the actual losses on the position exceed the position margin).
The digital currency futures market has high volatility and leverage, making it susceptible to bankruptcy risks. Let's take an example where an investor shorts Bitcoin, and the liquidation price is set at $30,000. If the market price suddenly and abnormally surges above $30,000, and there are very few orders close to $30,000 in the order book, the investor's futures cannot be closed and executed in time, and the position can no longer be settled at a price better than the bankruptcy price, leading to position losses greater than the margin. This situation is known as bankruptcy. In case of bankruptcy, the excess losses will be covered by the MEXC insurance fund account.
To protect user interests, MEXC employs an insurance fund to ensure the smooth completion of the liquidation process. When the losses from a position exceed the margin, the insurance fund is used to cover the bankruptcy losses. The increase in the the insurance fund comes from the surplus generated by liquidation orders being executed at prices better than the bankruptcy price in the market.
You can click on this link to view the current and past insurance fund amounts for various cryptocurrencies.
Disclaimer: This information does not provide advice on investment, taxation, legal, financial, accounting, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.