What Is Automatic deleverage?
In cryptocurrency perpetual futures trading, “automatic deleverage” (often abbreviated as ADL or auto-deleverage) refers to a risk management mechanism implemented by exchanges to prevent systemic losses when a trader’s position becomes bankrupt and the platform’s insurance fund cannot fully absorb the resulting shortfall. This typically occurs in highly volatile markets where liquidations happen at prices worse than the bankruptcy price, leading to uncovered losses.
How ADL works
Triggering ADL: When a position is liquidated but cannot be closed at or better than its bankruptcy price (the price at which the position’s value equals zero after accounting for margin and fees), the exchange’s insurance fund steps in to cover the difference. If multiple such events deplete the fund below a certain threshold (e.g., when the fund’s balance plus the liquidated position’s unrealized P&L and margin ≤ 0), ADL is activated as a last resort to restore the fund.
Ranking and Selection: Profitable positions on the opposite side of the liquidated trade (e.g., longs if a short is bankrupt, or vice versa) are ranked for deleveraging. Ranking is typically based on a combination of profit percentage and leverage, prioritizing the most profitable and highly leveraged positions. For example: - On some platforms, it’s calculated as Leveraged Returns = Position P&L (%) × Position Margin Rate (for isolated margin positions in profit). - On others, it’s Leverage PnL% = Position’s PnL% × Effective Leverage, with higher positive values deleveraged first. Exchanges often display an ADL indicator (e.g., 1-5 lights) to warn users of their risk level based on this ranking.
Execution: Selected positions are partially or fully closed at the bankruptcy price of the liquidated position, with the proceeds contributing to the insurance fund. This offsets the losses without the exchange bearing them. Active orders on affected positions are canceled, and traders are notified via email or app. Fees may apply, such as maker fees for the deleveraged trader.
Risks and considerations
ADL can shock even experienced traders by forcibly reducing winning positions, potentially locking in profits prematurely or at unfavorable prices. It amplifies risks in crypto’s 24/7, high-volatility environment, where flash crashes can trigger mass liquidations. To mitigate, traders can use lower leverage, monitor ADL indicators, or employ hedging strategies (e.g., delta-neutral across spot markets and futures), which may lower ranking priority. While rare, ADL events have occurred during major market moves, like crypto crashes, affecting platforms such as Bybit, OKX, Binance, and others.
See also