As one of the world’s fastest growing cryptocurrency derivatives exchanges, Bybit prides itself on providing a fair, transparent and efficient trading environment. We also offer leveraged trading, allowing traders to open substantially larger positions than their actual initial investment. This makes trading on Bybit an attractive proposition, whereby any loss is limited to the initial margin while the upside is not capped.
Leveraged trading on Bybit means that traders can apply up to 100x leverage to their trades when opening a position. However, a highly leveraged position may be liquidated and closed at a worse than bankruptcy price in a volatile market. How can we manage and absorb the excess loss, so traders already dealing with loss are not on the hook for more than their initial margin, and profiting traders are not made to cover the difference?
That’s where the Bybit insurance fund comes in.
Bybit’s insurance fund is, quite simply, a reserve pool that the system can dip into in order to protect traders from negative equity and being held accountable for excessive loss. Assuming that a trader’s position has been liquidated; if the close price is better than the bankruptcy price, the trader’s remaining margin will be added to the insurance fund. However, if the close price is worse than the bankruptcy price, the loss of the position will have exceeded the trader’s initial margin, whereupon the deficit will be covered by the insurance fund.
How does the Bybit insurance fund work?
Let’s have a look at the following scenario:
Ann opens a BTCUSD long position contract at $11,383.50 with 10x leverage. Her liquidation price is $10,396.00 and bankruptcy price is $10,348.60.
Bill also enters a long position of the BTCUSD contract at $11,383.50. However, he chooses to apply 25x leverage, which sets his liquidation price at $10,999.00 and bankruptcy price at $10,945.70.
Unfortunately, in this hypothetical scenario, the price of BTC drops drastically to $10,370.00, which goes against both Ann and Bill’s long positions. This ultimately leads to both traders’ positions being forcibly closed.
In Ann’s case, the price of BTC has dropped below her liquidation price. As such, her position is closed by the liquidation engine at $10,370.00. Since the close price is above her bankruptcy price ($10,348.60), the remaining margin will be added to the insurance fund.
Bill’s position is also forcibly closed by the liquidation engine at $10,370. However, unlike in Ann’s case, the price has dropped below Bill’s bankruptcy price ($10,945.70). This leaves him with negative equity, which means his loss is greater than his position margin. As a result, in order to make up for the difference, reserves will have to be drawn from Bybit’s insurance fund to make up for the negative equity.
The current status of Bybit’s insurance fund
As of Aug 25, 2020, Bybit has accrued an insurance fund value worth nearly 2,149.9 BTC. The total has been steadily rising in a market where the price of BTC is relatively stable and the trading platform has sufficient liquidity.
In March 2020, when BTC’s price plummeted dramatically, the insurance fund size dropped from nearly 1,310.06 BTC (on March 13) to 1,280.59 BTC (on March 14). However, the size of the insurance fund has since stabilized due to Bybit’s sufficient liquidity and relatively low slippage. On the other hand, Bybit didn’t accumulate vast amounts of insurance fund through excessive liquidation either.
All in all, if there’s only one thing you take away from this, it’s to think of Bybit’s insurance fund as a defensive layer. It is there to spare profiting traders from the risk of being auto-deleveraged (ADL).The healthier the insurance fund is, the less chance of auto-deleveraging.