What Is the Concept of ‘Haircut’ When Using Non-Cash Assets as Collateral?

A haircut is a reduction applied to the market value of a non-cash asset when it is used as collateral. It is a risk management measure by the exchange to account for the asset's price volatility.

For example, if Bitcoin is trading at $50,000, but the exchange applies a 10% haircut, its collateral value is only $45,000, providing a buffer against price drops.