Auto-Deleveraging: Why Crypto Exchanges Close Winning Trades

What is auto-deleveraging?

Perpetual futures are some of the most popular products in crypto: contracts that let traders bet on the price of an asset without ever having to take ownership of it, and with no expiration date. Traders love them because they offer leverage, meaning you put up only a fraction of the position’s value as collateral. The same leverage that makes gains feel thrilling, however, can make losses turn violent. If the market races through a trader’s collateral before the exchange can close the losing position, the platform has a bookkeeping problem: it owes profits to winners that no one has paid for.

That is the moment auto-deleveraging (ADL) comes into play. ADL is not a normal trading feature. It is a last-resort risk tool, used when ordinary liquidation has failed and the exchange’s insurance fund cannot absorb the leftover loss. In plain language, ADL force-closes or reduces positions held by traders on the opposite side of the failed trade—often profitable, highly leveraged traders—so the platform can keep its accounts balanced and avoid becoming insolvent.

This is why traders sometimes say you can be right and still get hurt. Your winning position may be the exact mirror image of someone else’s bankrupt position. If that bankrupt trader cannot pay you, the exchange may look at your position to settle the bill.

The safety ladder: from margin to insurance fund

To understand ADL, it helps to see the steps that come before it. Every leveraged trade is backed by margin, which is a slice of collateral you post to keep the position open. If the market moves against you, losses eat into that margin. Each exchange sets a liquidation price: the level at which it forcibly closes your position before your margin is completely gone. Further down sits the bankruptcy price, the point where the margin backing the position has been fully exhausted.

Exchanges usually try to close positions before they reach bankruptcy. But in a fast, chaotic crash, there may be no buyer or seller at an acceptable price, and the position gets closed at a worse level than planned. That creates a shortfall.

To cover such gaps, exchanges maintain an insurance fund. The fund is a shared reserve, topped up whenever liquidations are closed at prices better than the bankruptcy price. Think of it as a communal buffer designed to protect winners from losses caused by people who couldn’t pay. BitMEX described its fund as the “last line of defence” against ADL, and Phemex similarly uses its fund to keep winning traders whole. But the buffer is finite. During extreme market stress, when many leveraged accounts fail at once, losses can wipe out the fund. When the fund is exhausted, the exchange reaches the last step on the ladder: auto-deleveraging.

Who gets picked, and why it feels unfair

ADL is not random. Exchanges rank opposite-side positions using their own calculations, usually based on a common idea: profit plus leverage. A trader with a large unrealized gain and high effective leverage sits closer to the front of the queue than one with a modest gain and low leverage. Think of it as a combination of “how much you have won” and “how much leverage helped you win it.”

Profitable positions are given priority, but some exchanges note that positions in loss can still be selected if there are not enough profitable counterparts. The ranking is not a moral judgment about winners. It is a way for the exchange to remove the most risk from the system with the fewest forced trades.

The result can feel arbitrary, and sometimes it is genuinely costly. When ADL executes, positions are typically closed at the bankrupt trader’s bankruptcy price, not at the market price you see on your screen. Depending on where you entered, a trade that was showing profit can end up settling as a loss. KuCoin’s own explainer is blunt on this point: even profitable positions may incur losses as a result of ADL settlement.

What an ADL event actually looks like

Imagine a heavily leveraged long position blows through its bankruptcy price during a sudden price crash. The exchange’s liquidation engine tries to sell that position, but buyers vanish. The insurance fund is already stretched. On the other side of the trade, many short traders are sitting on profits. The exchange then works down its ranking list, forcibly reducing enough short positions to offset the bankrupt long. Those affected traders get a notification, their open orders are cancelled, and their remaining exposure shrinks without their consent.

ADL events are rare, but they do happen. In March 2020, one of crypto’s most violent crashes pushed BitMEX’s insurance fund to a deep drawdown, although the exchange said ADL was ultimately prevented. In October 2025, a wave of selling triggered over $19 billion in liquidations across crypto markets and forced several venues into ADL. One research study of that episode found that on a single platform, ADL was used repeatedly within a ten-minute period, closing about $2.1 billion in positions. When leverage is widespread, the safety net itself can become part of the story.

A compromise, not a cure

ADL exists because crypto derivatives exchanges have a hard choice. If they do nothing after a large loss, they may not have enough money to pay winning traders, and confidence in the platform collapses. If they use ADL, they preserve the exchange but impose costs on people who were on the right side of the market.

This tension is not just a crypto quirk. In traditional finance, clearing houses sit between buyers and sellers and handle defaults through layered buffers, capital contributions, and mutualized default funds. Their loss-sharing rules are designed so that ordinary traders are rarely forced to bear a default directly. Crypto exchanges, by contrast, have leaned on a more direct mechanism: when the insurance fund runs dry, winners are asked—automatically—to give some back.

Some critics call ADL a design flaw rather than a market failure, and a formal research analysis of ADL showed that no mechanism can simultaneously maximize exchange safety, revenue, and fairness to traders. ADL was introduced by crypto venues around 2015 and 2016, and the basic “profit times leverage” ranking used by BitMEX still underpins most major platforms today. But this does not mean every platform works the same way. Trigger thresholds, ranking formulas, and payout details vary, and many of the most sensitive numbers are not published.

Can traders reduce their ADL risk?

Exchanges document several ways to lower your place in the ADL queue. Lowering leverage is the most direct lever, and Bybit notes that it can reduce your ADL ranking in real time. Adding margin can also lower effective leverage. Reducing the size of a profitable position can shrink the number of contracts exposed, even if it does not necessarily change your rank. Hedging, where the venue recognizes it, may place fully hedged portions further back in the queue. Trading more liquid contracts can also help, because ADL is far more likely in thin markets where order books disappear under stress.

None of these steps can eliminate ADL risk completely, and some exchanges warn that even hedged or conservative traders are not fully immune. That is why many platforms show queue indicators, often warning lights, so users can see how close they are to the front line. But those indicators come with limits: not all trigger parameters are public, and rules can be adjusted as market conditions change.

Leveraged crypto trading is also not available everywhere. Rules vary by country and by platform, and derivatives can carry losses far beyond what a new trader expects. ADL matters less if you trade with small size and low leverage, and more if you are the kind of trader who uses high leverage and sits on large paper profits during a crash. Understanding the safety ladder does not make an extreme market comfortable, but it does explain why the ladder exists—and why the last rung can sometimes grab the person who was winning.