# Insurance Funds and Auto-Deleveraging > Auto deleveraging closes profitable positions when liquidations cannot be absorbed. Learn how ADL works, how traders are ranked and how to reduce the risk. Source: https://learn.tradelabsai.com/crypto/auto-deleveraging/ Track: Crypto · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Insurance Funds and Auto-Deleveraging", https://learn.tradelabsai.com/crypto/auto-deleveraging/ Auto deleveraging (ADL) is a last resort mechanism used by crypto derivatives exchanges. When a liquidated position cannot be closed in the market at a price better than the bankruptcy price, and the exchange's insurance fund cannot cover the loss, the exchange automatically closes positions held by traders on the other side, usually the most profitable and most leveraged ones. It means that even a winning trade can be cut short without warning. Understanding ADL helps traders appreciate a risk that does not exist in the same way on traditional regulated futures exchanges. ## Why ADL exists In crypto perpetual markets, every long has a matching short. When a trader is liquidated: 1. **The liquidation engine tries to close** the position in the order book. 2. **If it fills above the bankruptcy price** (where the trader's margin is fully used), the leftover margin may go to the insurance fund. 3. **If it fills worse than the bankruptcy price,** the insurance fund covers the shortfall. 4. **If the insurance fund is depleted or the market cannot absorb the position,** the exchange uses ADL: it closes opposing positions at the bankruptcy price to remove the risk. Traditional futures exchanges use clearing house default funds and member contributions instead, so profitable clients are not usually closed out. See [Clearing Houses and Central Counterparties](https://learn.tradelabsai.com/market-structure/clearing-houses/). ## Who gets deleveraged Exchanges rank traders in an ADL queue, typically by a combination of profit and leverage: ``` ADL ranking ≈ unrealised profit percentage × effective leverage ``` Traders with large profits and high leverage are deleveraged first. Many exchanges show an ADL indicator, often five lights, showing where your position sits in the queue. **Example: How ADL hits a winner** A sharp crash sends an altcoin down 40% in minutes. Thousands of leveraged longs are liquidated, but the order book is thin and the insurance fund for that contract runs out. A trader who is short with 20x leverage and sitting on a 300% unrealised gain is at the top of the ADL queue. The exchange closes the short at the bankruptcy price of a liquidated long. The trader keeps the profit made up to that point but loses the position and any further gains, and must decide whether to re enter in a fast market. ## When ADL happens ADL is rare on deep, liquid markets like Bitcoin and Ether perpetuals on major exchanges, but more common: - **In small altcoin perps** with thin order books. - **During extreme volatility,** such as the October 2025 crash, when several exchanges triggered ADL on various contracts as liquidations overwhelmed liquidity. - **On newer exchanges** with smaller insurance funds. ## Insurance funds Exchanges build insurance funds from liquidation leftovers and sometimes their own capital. Large exchanges report funds worth hundreds of millions or billions of dollars. A healthy insurance fund reduces the chance of ADL but does not eliminate it. Some exchanges publish their insurance fund balances. ## How to reduce ADL risk 1. **Lower leverage** moves you down the ADL queue. 2. **Take partial profits** on big winners in volatile markets. See [Scaling Out and Partial Profits](https://learn.tradelabsai.com/position-management/scaling-out-and-partial-profits/). 3. **Prefer liquid contracts** with deep order books. 4. **Use exchanges with large insurance funds** and transparent ADL rules. 5. **Watch the ADL indicator** on your position. 6. **Spread positions** rather than concentrating in one small contract. ## Related risks - **Socialised losses:** older crypto exchanges sometimes spread losses across all profitable traders, which ADL replaced as a more targeted method. - **Exchange default:** if an exchange itself fails, positions and funds may be lost entirely. See [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/). ## Frequently asked questions ### What is auto deleveraging in crypto? A mechanism where an exchange automatically closes profitable opposing positions when liquidations cannot be covered by the market or insurance fund. ### Who gets auto deleveraged first? Usually traders with the highest combination of unrealised profit and leverage. ### How can I avoid auto deleveraging? Use lower leverage, take profits on large gains during volatile periods and trade liquid contracts on exchanges with large insurance funds. Next, learn how exchanges calculate fair prices in [Mark Price vs Index Price](https://learn.tradelabsai.com/crypto/mark-price-vs-index-price/). ## Continue learning - Next lesson: [Mark Price vs Index Price](https://learn.tradelabsai.com/crypto/mark-price-vs-index-price/) - Previous lesson: [Liquidations in Crypto](https://learn.tradelabsai.com/crypto/liquidations-in-crypto/) - Related: [Liquidations in Crypto](https://learn.tradelabsai.com/crypto/liquidations-in-crypto/): A liquidation is the forced closing of a leveraged crypto position when margin runs out. Learn how liquidation prices work, cascades, heatmaps and how to avoid them. - Related: [Perpetual Futures](https://learn.tradelabsai.com/crypto/perpetual-futures/): Perpetual futures are crypto derivatives with no expiry, kept close to spot by funding payments. Learn how perps work, leverage, margin, funding and the main risks. - Related: [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/): Learn the difference between market risk, credit risk and counterparty risk, how each is measured and managed, and real cases from Lehman Brothers to FTX. - Related: [Clearing Houses and Central Counterparties](https://learn.tradelabsai.com/market-structure/clearing-houses/): Clearing houses stand between buyers and sellers so every trade is honoured. Learn how central counterparties work, margin, default funds and why they matter. - Related: [Mark Price vs Index Price](https://learn.tradelabsai.com/crypto/mark-price-vs-index-price/): Crypto derivatives use three prices: last, index and mark. Learn how each is calculated, why mark price triggers liquidations and why gaps between them matter.