Phemex uses an Insurance Fund to prevent positions from becoming Auto-Deleveraged. The Insurance Fund alleviates unfilled liquidation orders on the platform before they are taken over by the auto-deleveraging system. Due to how Phemex’s platform is structured, the exchange does not require payments from traders who have negative account balances when they are liquidated in a leveraged trade. Instead, the exchange uses its Insurance Fund to ensure the winning party of a trade receives all of their expected profits, even if the losing party does not have enough to cover the winning party’s gains. The Fund grows from liquidations that were able to be executed in the market at a price better than the bankruptcy price of that specific position.
In what kind of situation would I need the insurance fund?
A huge liquidation can cause a cascade of margin calls/stops. Phemex provides an insurance fund so that everyone receives their due profits without anyone owing more than they initially invested.
Is the insurance fund used often?
No, the insurance fund comes into action only in extreme circumstances, it acts as a safeguard for the hazards of leveraged trading.
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