What Is the Risk of ‘Negative Equity’ in a Highly Leveraged Crypto Derivatives Position?

Negative equity occurs when the losses on a leveraged position exceed the collateral posted by the trader, resulting in a balance below zero. This is a significant risk in highly volatile crypto markets where rapid price swings can prevent liquidation systems from closing the position fast enough.

Exchanges typically use insurance funds or auto-deleveraging (ADL) to cover these losses, protecting the solvency of the platform.