Collateral haircut
Why is posted collateral counted at less than its market value, and how much fall does that gap absorb?
In plain words
A collateral haircut is the discount applied to an asset's market value when it is used to back a loan or position. A hundred dollars of collateral might count as less than that, with the remainder held as a buffer against price falls.
Why it matters
The haircut protects the lender and the clearing system if the collateral loses value before it can be sold. A larger haircut means less borrowing power for the same assets, and assets seen as more volatile or harder to sell carry larger haircuts.
In a real week: ETH, week of 17 April 2023
In the week of 17 April 2023, ETH fell 12.11%, closing at 1862.0 after touching a high of 2125.0 and a low of 1825.0, a range of 16.44%. A weekly move of this size is what a haircut is sized against: the larger the discount taken at the start, the more of a fall the counted value can absorb before it reaches zero.
A common mistake
Assuming the haircut is a penalty or fee. It is a valuation discount that changes how much can be borrowed, not a charge taken from anyone.