What Happens If a Crypto Exchange’s Margin Requirements Are Too Low?

If an exchange's margin requirements are too low, it increases the risk of market instability and potential exchange insolvency. Low margins allow traders to take on excessive leverage.

When a market shock occurs, the small margin is quickly wiped out, leading to a surge in uncollectible losses. The exchange's insurance fund or, in the worst case, its profitable traders (via ADL or socialized losses), must cover the deficit, which can erode trust and cause a systemic event.