In 2009, a programmer named Satoshi Nakamoto mined the first block of a peer-to-peer cash network that ran on the back of what would later be known as blockchain technology. The name of this new coin? Bitcoin.
While most folks would struggle to name the top 10 cryptocurrencies today, the likes of bitcoin and Dogecoin have become fairly mainstream. However, along with the explosive profits, cryptocurrency has a well-earned reputation as the Wild West of money. As a result, when things go wrong, it's not unusual for crypto investors to be left holding the bag.
Cryptocurrency insurance is important because it allows businesses and big-time investors to protect their crypto more easily. Want to learn more? Just keep reading.
What Is Cryptocurrency Insurance?
As the name would suggest, crypto insurance is designed to protect the assets of crypto investors and businesses.
In practice, this isn't too dissimilar from most other forms of insurance in the sense that policyholders are expected to pay a premium every month in exchange for coverage. However, simply because crypto is so different from a business or a house, insurers have had to be creative when looking for ways to provide protection.
It seems like for the most part, crypto insurance now comes in two general forms:
Method 1: Insurance That Protects the Value of the Coins
You don't have to be a blockchain expert to know that despite the big-time financial rewards, holding crypto can be tricky. Unlike a bank where you don't have to worry about the actual mechanics of holding and storing your money, with crypto, the onus to protect your coins is on you.
But here's the thing:
If your wallet provider is ever hacked or if your keys ever go missing, it's almost impossible to get your coins back. One way that cryptocurrency insurance works is by making it possible for you to insure the value of your coins. In some ways, this is very similar to taking out house insurance or car insurance.
Method 2: Insurance That Protects Crypto Businesses
In 2014, Mt. Gox shocked the world when it was discovered that the exchange had lost 740,000 bitcoins.
The other way that insurers can provide cryptocurrency insurance is by offering coverage solutions to crypto businesses.
You might be looking at that and wondering how that could apply to individuals like you. And the answer is quite simple:
If you leave your money at the bank and that bank gets robbed, your bank account balance doesn't go down to zero. In fact, your funds stay the same in part due to the insurance policies that your bank has taken out.
The downside is that not every business will be able to get full insurance in part because politicians and society at large are still figuring out what to do with crypto assets. Should we treat it like a precious metal? Is it less like the standard dollar and more like gold?
In the crypto world, new coins and new exchanges appear all the time. And as more and more businesses start to offer crypto-based versions of traditional activities like peer-to-peer lending and crypto credit cards, it's clear that the cryptocurrency market is moving towards increased stability.
Working with insured businesses can only help crypto investors in this regard.
How Do They Do It?
Surprisingly, figuring out what to insure is the hardest part for insurers. Once the details of the policy and the particulars of the premium are laid out, however, many insurance providers are navigating the volatility of the crypto market by taking payment in crypto.
Cryptocurrencies prices often leave people saying things like, "This was worth $35,000 last week and it's valued at $20,000 today.". Cryptocurrencies crash all the time and if you're an insurer, you can't even predict how much the coins will be valued next month. Never mind the day in the future that a random hack occurs.
Taking payment directly in cryptocurrency helps out both sides. So don't be surprised if in the future you find insurers offering the option of making payments in either cryptocurrency or Canadian dollars.
What Does Crypto Insurance Cover?
This is an area that may change as we start to learn more about crypto and its impact on the overall market, but you may be able to see a few specific forms of crypto insurance:
1. Errors and Omissions, Product Liability, and Negligence
It's not every day that you see all these types of coverages mentioned together. But this is basically to say that even though the world of crypto is all about innovation, sometimes advisors can point you to the wrong product offering or a mistake in the cybersecurity setup can result in the loss of coins. These forms of cryptocurrency insurance can protect businesses against claims from customers that have lost their crypto.
Whether it's an issue of product liability or outright negligence, investors like you can breathe a little easier by doing business with individuals and organizations who are fully insured.
2. Criminal Liability
As we mentioned before, when you own crypto, the responsibility for keeping it safe falls on you. But whether you use cold storage methods or hot storage methods, both strategies have their flaws. You could lose the keys in a fire or the exchange you're using could be hacked. This form of insurance may be available to both businesses and individuals who are concerned about losing their crypto assets due to theft.
3. Cyber Liability
This type of coverage is primarily available to businesses, but it still pays to know if the exchange or the wallet provider you've been expressing an interest in has the right policies in place for handling data breaches. Because crypto businesses often require individuals to provide identification while also being in a space that experiences more hacks and malware attempts than normal in other industries, cyber liability just makes sense.
4. Directors & Officers' Liability
When a company is owned and operated by more than one person, sometimes the decisions made by people in management can lead to audits and lawsuits. Maybe the CTO made a choice that was obviously putting people's data at risk or perhaps the executive branch decided to cheap out on their cybersecurity options.
This type of policy is admittedly harder to find in the cryptocurrency space simply because so much about it exists in a bit of a legal gray area. But it also offers protection to businesses against losses that come about as a result of decisions made by managers and directors.
Why Insure Your Crypto?
Cryptocurrency is exactly what people are thinking of when they hear the words "Boom and bust cycle.". It's not unusual for coins to have massive spikes in value followed by huge downswings and extended periods of not doing much.
But while many people have been able to ride their cryptocurrency gains to a better and brighter financial future, the crypto market still comes with a certain risk that you simply don't see from banks or major stock exchanges to the same degree: cybertheft.
All of the storage methods available to crypto investors come with flaws. And if bitcoin is a part of your 10, 20, or 30-year investment horizon, crypto insurance can help you stay on track even if you become a victim of theft.
The Future of Cryptocurrency Insurance
Although crypto has seen the likes of Elon Musk and former prime minister Stephen Harper jump on the bandwagon, it's still very, very new by insurance standards.
What this means is that insurers simply don't have enough data about cryptocurrencies to understand them the way that they do gold. In practice, what this means is that the risk profile of cryptocurrencies is something that insurance providers are still working out.
In addition, because lawmakers and regulators are still catching up to crypto-based exchanges, it's not so clear what direction the market itself will take. For example, China's ban on crypto mining had a noticeable impact on the market. And that's just one example of government response to crypto.
However, all of this aside, cryptocurrency insurance will likely continue to expand as coins become more and more commonplace.
With policy offerings like D&O insurance being less available at the moment, the commercial side may see slightly faster development. But with policies that cover coins directly becoming available, individual crypto investors could have a solid number of options to choose from as well.
Is Crypto Insurance Coming to a Broker Near You?
Any time you have something as new, novel, and technical as cryptocurrency and its related activities, it takes time to fully suss out the ins and outs.
So where does that leave cryptocurrency insurance? Well, the market is here. And the mechanism for providing more coverage is there. All we can do now is wait and see what happens.
Are you looking for a personal or commercial insurance solution? Get a free Insurdinary quote today!