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What Is Crypto Insurance, and How Does It Work?
Crypto insurance is a relatively new concept in the world of finance. And while some people are already familiar with traditional forms of insurance, others might not know what the term even means. In short, it refers to insurance coverage for cryptocurrencies.
There is no federal guarantee for protection against loss as there is with fiat currency. The reality is that cryptocurrencies demand a high level of personal responsibility – managing your own money independently of any centralized entity means you’re entirely responsible for all scenarios yourself. Things often don’t go according to plan. Cryptocurrency hacks and thefts cost millions of dollars every year. Private keys and backup phrases are often stolen too. It’s estimated that the total losses due to private key mismanagement could be up to 20% of all existing bitcoins. One of the biggest barriers to widespread use of cryptocurrencies is the risk of losing access to your private keys.
There is currently a growing demand for cryptocurrency protection, especially for the events such as theft. Insurers have been struggling with the underwriting process because of the lack of cohesive regulations within crypto insurance. Newer and more forward-looking startups have been more proactive than older ones in this regard, but U.S.-based companies are still more likely to be dipping their toes into the water than diving right in.
Can You Insure Bitcoin? Here’s What You Need to Know
Investors looking to protect themselves against potential losses associated with cryptocurrencies need look no further than the traditional financial system. Through regulated exchanges and brokerage firms, most people invest in stocks and bonds, both of which come with a certain degree of protection.
However, many cryptocurrency owners aren’t aware of the extent of what they’re giving up by investing in digital assets, especially since it’s still relatively early days for the space. Just because something isn’t regulated doesn’t mean it’s completely safe.
While some major players like Coinbase have taken steps to ensure customers’ funds are protected, there’s little oversight for smaller startups and even individual traders. This leaves investors vulnerable to scams, hacks and other issues that could lead to loss of funds.
That said, there are ways to safeguard yourself. Some of those include diversifying your holdings across different coins, ensuring you use reputable exchanges and keeping track of where your money goes.
Is my cryptocurrency insured by the US government?
Cryptocurrency assets are not covered by the federal government at this time.
The Federal Deposit Insurance Corporation (FDIC), the agency responsible for protecting consumers’ deposits at banks, does not insure cryptocurrencies such as bitcoin.
Cryptocurrencies are digital currencies used online. They’re different from traditional currencies because they don’t rely on central governments or banks to issue and control them. Instead, they use cryptography to generate units of currency and verify transactions. Cryptocurrency exchanges often require customers to hold funds in virtual wallets rather than in physical bank accounts.
To date, there aren’t any regulations governing how companies must treat customer holdings of cryptoassets. This lack of clarity has led to concerns about consumer protection and security. In fact, the SEC recently warned investors against buying certain initial coin offerings (ICO) due to potential fraud.
Cryptocurrency doesn’t have any federal protections. As far as the gov’t is concerned, you’re not covered by any insurance.
Do Crypto Exchanges Offer Insurance?
Exchanges like Coinbase, Kraken, Gemini and all other exchanges that are active and registered in the USA are FDIC insured ONLY for the cash deposits held in your account.
Federal Deposit Insurance Corporation generally insures up to $250,000 per person, per exchange. It covers all checking accounts, savings accounts, money market deposit accounts and certificates of deposit.
Bitcoin is not legal tender and isn’t backed by the government. Cryptocurrencies are not insured or guaranteed by either the FDIC or SIPC. Any losses you may incur in trading cryptocurrencies are your responsibility alone.
Some of these exchanges choose to fund their own insurance plans. After its major Binance hack, Binance allocated 10% (or $4 million) of its total trading fees ($100 million) to an insurance fund and then paid out $40 million (or $2 million per day) from that fund. Stablecoin provider, Equilibrium, has a fluctuating fund currently worth $10.8 million. It protects users in case the value of their stablecoins is ever threatened.
Coinbase, one of the biggest US-based crypto exchanges has a $255 million crime coverage policy.
Likewise, BlockFi and Bitstamp, two other crypto exchanges, carry crime insurance. BlockFi offers theft insurance through its primary custody wallet, Gemini.
Insurance Policies for Hot Wallets
Only a handful of crypto wallets employ some insurance-backed platform like Coincover. And these wallets are not focused on retail but mostly on institutions.
Coincover provides protection for wallets like Vesto, BitGo and Civic. According to Coincover’s CEO David Janczewski, it offers an insurance-backed guarantee underwritten by Lloyd’s of London for lost or stolen funds. This means you’ll be protected (by virtue of using those wallets) from all theft and loss including brute force attacks, cyberattacks, device theft and hacking. And if your crypto is stolen because Coincover’s technology fails to perform, Coincover will pay you back up to the amount you’re eligible for (this amount depends on the level of protection the wallet you purchased offers).
Hardware wallets like Ledger Nano X, Nano S Plus or Trezor have no insurance either. They are just technologically secure tools that you need to manage properly in order to keep your crypto safe.
Smart Contract Insurance
As we saw in 2017, smart contracts are still very much in their infancy. They are still being tested, and there are many questions about how they could fail. There have been several hacks, including the infamous DAO hack that resulted in the loss of over $50 million worth of Ether.
There are now companies providing insurance for smart contracts. One example is Nexus Mutual, which offers coverage for up to $1 billion in assets per policy. Another option is Opyn, which covers up to $100 million dollars in losses. Both of these options cover the value of cryptocurrencies held in wallets, rather than those stored on exchanges.
These insurance options are important but, in most cases, less relevant for basic crypto holders. For one thing, you don’t want to lose everything — even if it is insured. Also, people holding large amounts of cryptocurrency tend to keep them in cold storage anyway.
Does private insurance exist for cryptocurrency?
There are some different forms of insurance that cover cryptocurrency purchases, but they are generally aimed at large companies and institutions. Private insurance does exist, but it’s very rare because the market is still relatively young.
Because crypto insurance exists mainly at the exchange and wallet level rather than the individual user level, whether you’re insured depends on which crypto services you use.
Why Are So Few Companies Providing Crypto Insurance?
The cryptocurrency industry is booming. There are now over 2,500 different coins out there, each one with its own unique value proposition. But while many people are making money off of the rise of cryptocurrencies, some aren’t. In fact, there are still many risks associated with owning cryptocurrencies, especially those that trade above $10,000.
That’s where the problem starts. As we’ve seen in recent months, prices for certain cryptos have dropped dramatically. This makes it hard for investors to sell their holdings without taking a big loss. And because these losses can be substantial, investors often turn to insurance products to protect themselves against such potential losses.
But despite the growing popularity of crypto insurance, most insurers don’t offer coverage for cryptos. Why? Because the process of assessing the risk posed by cryptocurrencies is difficult.
For example, the price of cryptocurrencies like bitcoin and ethereum fluctuates constantly. If you want to insure yourself against a drop in the value of your investment, you’ll have to pay a premium for the privilege. However, since the underlying asset is volatile, the premiums can be quite high.
Another reason why many insurers won’t cover cryptocurrencies is that the price fluctuations are too steep and unpredictable. While stocks tend to move slowly, cryptocurrencies can see huge swings in just minutes. This makes it tough to assess whether something like a crash is likely.
In addition, the volatility of cryptocurrencies makes it impossible to determine what the “true” value of an investment actually is. After all, if the price of a coin drops by 50% overnight, does that mean it’s worth half as much as it was yesterday? Or could it be that the price has simply adjusted itself to reflect today’s conditions?
This uncertainty leads to another issue: there’s no way to know if someone is trying to defraud you. A scammer might use multiple identities to buy thousands of dollars’ worth of altcoins, then claim that he lost his wallet and ask you to send him funds. He knows that you’re unlikely to check up on him, so he doesn’t have to worry about being caught.
Final thoughts
The cryptocurrency market has been growing rapidly over the past few years. As of July 2022, there were about $1 trillion worth of coins in circulation, according to CoinMarketCap.com. And while that number might seem small, it’s actually pretty large compared to the total value of all currencies traded worldwide — about $7 trillion, according to World Bank data.
But what happens when something goes wrong? What if someone steals your wallet or loses access to your keys? How do you know whether your money is safe?
That’s where blockchain-based insurance companies come into play. These startups provide a way to protect crypto investors against theft and fraud without having to buy traditional insurance products. However, there are still only a few of them and given the limited coverage that exists today, you’ll likely want to brush up on crypto security measures and actions to take if your crypto is stolen.
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