Why Do Exchanges Cap the Maximum Leverage for Certain Contracts?
Exchanges cap maximum leverage to manage and limit their systemic risk exposure. Higher leverage dramatically increases the probability of liquidation and the potential for a negative balance, which the insurance fund must cover.
By capping leverage, the exchange maintains a larger buffer between the liquidation and bankruptcy prices, protecting the insurance fund and reducing the risk of Auto-Deleveraging or socialized losses.
Glossar
Leverage Cap
Constraint ⎊ The leverage cap, prevalent in cryptocurrency derivatives and options trading, represents a predetermined maximum multiplier applied to an investor's notional exposure relative to their margin or collateral.
Cap
Strike ⎊ Cap, within cryptocurrency derivatives, denotes the predetermined price level at which an option contract ⎊ typically a call or put ⎊ may be exercised.
Maximum Leverage
Amplification ⎊ Maximum leverage, within cryptocurrency and derivatives markets, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-exposure profiles.