Cryptocurrency insurance could be a big industry in the future. It presents opportunities for investment and to secure investments in cryptocurrencies. Just recently popular cryptocurrency exchange, Coinbase revealed that it has a $255 million cover of its assets. Leading insurance giants like Aon and Lloyds are getting into the mix. This heightened interest in crypto-insurance could present opportunities for investors and crypto-holders in the future.
Risks vs. Insurance
Hacks, theft, loss of private keys and acts of God. Cryptocurrency owners and businesses lose millions of dollars annually. This, of course, is a reason to panic but it is also a reason to be excited about the opportunities for new sources of revenue in the insurance industry and crypto-industry.
The insurance marketplace for cryptocurrencies has received the help of big players like Aon over the years. Two main classes today are Crime and Specie marketplaces.
Specie policies cover physical damage or loss of private keys (including employee misuse or theft) in cold storage. Unfortunately, it doesn’t directly cover hacking or blockchain-specific failure.
Cryptocurrency Insurance Policies
Crime policies cover hot wallet losses and losses resulting from hacks, insider theft, fraudulent transfers, etc. Failure of underlying currencies is not usually covered. For example, a 51% attack on a cryptocurrency does not warrant such a cover.
Insurance firms make bespoke products for the industry. Such products are tailored to the specific needs of clients. A Bloomberg report reveals that many startups and companies working within the cryptocurrency industry usually opt for theft coverage. Premiums can be as high as $10 million for theft coverage. Startups can find themselves paying as high as 5 percent of coverage limits.
Gemini Trust Company and Coinbase have both asserted that they have Federal Deposit Insurance Corporation-insured deposits. Insurance of fiat deposits in cryptocurrency exchanges adds a layer of confidence. Usually, exchanges have to prove to underwriters that they meet minimum standards.
Typically insurance firms write policies to exchanges or custodians instead of owners of cryptocurrency. This makes it harder for a holder of cryptocurrency with an exchange to understand the nature of policies. Direct conversations with exchanges help to gain a better understanding of their insurance policies and the steps to be taken in relation to those policies in the event of a theft or other event.
Cryptocurrencies grow at significantly high rates, outstripping the fiat values which policies are denominated in. Bull markets may make it more complex for companies to increase their insurance limits at the same pace as asset prices.
Its early days for crypto and inevitably early days for its insurance industry. Ethereum and the decentralized finance landscape is likely to provide new insurance solutions in the future which could be invested in. As with most cryptocurrency projects, they will fail. Fortunately, crypto is here to stay. With the entry of leading insurance companies into the space, one may have a better idea of which exchanges are taking proactive steps to reduce risks of losses.
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Calvin Ebun-Amu is passionate about finance and technology. While studying his bachelor’s degree, he found himself using his spare time to research and write about finance. Calvin is particularly fascinated by economics and risk management. When he’s not writing, he’s reading a book or article on risk and uncertainty by his favourite non-fiction author, Nassim Nicholas Taleb. Calvin has a bachelors degree in law and a post-graduate diploma in business.