- Binance Futures Insurance Fund used over 12 million USDT to cover liquidations on May 9th.
- The exchange is adding 30 million USDT to replenish the insurance fund.
Cryptocurrency exchange Binance is replenishing its Futures Insurance Fund following Saturday’s Bitcoin plunge. The Binance Futures Insurance Fund covers losses incurred by bankrupt traders in periods of high volatility. On Saturday, Bitcoin plummeted over 10% in just minutes creating a highly volatile trading situation resulting in many position liquidations.
The insurance fund was rapidly depleted as Bitcoin’s price rapidly fell below the bankruptcy price of many positions. Prior to May 9th, the Bitcoin fund held over 21 million USDT. Following the period of high volatility and liquidations, the fund was left with just over 7.7 million USDT tokens.
Although the fund’s value dropped 13 million, the usage of the fund is good news. Trading cryptocurrencies is highly volatile, without Binance’s fund, many traders would have lost money as positions had to be settled below bankruptcy price.
However, the Ethereum fund did not see a significant decline. In comparison, the fund’s value only decreased by or 160,000 USDT, about 3%. This is most likely due to Bitcoin leading the fall. As a result, Ethereum did not see the same levels of high volatility as Bitcoin.
How the Insurance Fund Works
The Binance Futures Insurance Fund fills in the gap between bankruptcy prices and position close prices.
For example, if a trader opens a $10,000 long at a 10x leverage, the bankruptcy price will be $9,000. In other words, if Bitcoin drops to $9,000 the position will be liquidated and the trader will lose the whole position. However, if Bitcoin drops straight to $8,900 due to high volatility the position will be closed below the bankruptcy price, resulting in a negative settlement. The Binance Insurance Fund will then cover the negative settlement, ensuring that everyone gets paid and the trader does not incur a negative value.
Insurance funds like Binance’s are crucial for high volatility trading, common in crypto markets. Without insurance funds, trading cryptocurrency futures will become riskier for lenders allowing traders to borrow funds.
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