If you could buy insurance to protect your bitcoin, would you? As with all kinds of insurance, your answer is probably, “Sure—if the coverage is good and the price is right.”
What might you reasonably expect bitcoin insurance to cover? Let’s think about the types of losses insurance covers for other currencies and investments.
How FDIC and SIPC Insurance Protect Your Money
The Federal Deposit Insurance Corporation (FDIC) protects your savings if your bank can’t meet its financial obligations. Account holders are covered for up to $250,000 per person per bank. From 2001 through 2017, 553 banks failed in the United States. While bank failures aren’t common, they do happen.
The Securities Investor Protection Corporation (SIPC) protects customers if their brokerage fails by covering up to $500,000 in securities, including up to $250,000 in cash deposits. It doesn’t protect against poor investment choices or an investment declining in value.
Placing your money in a bank or investing it through a brokerage has many benefits, including protection against burglary and fire, the opportunity to earn interest and invest, and the ability to easily pay bills. Thanks to industry regulation, oversight, and insurance, we can enjoy these benefits with reasonable assurance that our funds are safe from certain threats. We also enjoy limited liability—often zero liability—if someone uses our credit or debit card fraudulently.
Neither FDIC nor SIPC coverage applies to cryptocurrencies. And crypto presents some unique risks that cash and securities do not.
First, the exchange where you store your cryptocurrency could get hacked. We’ve seen it happen over and over, from Mt. Gox to Bitfinex.
In the event of a hack, an exchange may be able to reimburse from its own profits what insurance doesn’t cover—if it has insurance at all. But that depends on the size of the profits and the size of the hack. The far more common outcome is that customers lose their funds, with little to no hope of getting them back.
There’s also the risk of loss. If you lose your private keys, your cryptocurrency is unrecoverable. And if someone else gains access to your private keys, whether because you’ve left them lying on your desk at work or stored them insecurely on an internet-connected computer, they can transfer your cryptocurrency to themselves.
Unlike fraudulent credit card or bank transactions, fraudulent cryptocurrency transactions can’t be reversed, nor is there an underlying company like Visa or financial institution like JP Morgan Chase that can make you whole.
What investor wouldn’t want assurance that their cryptocurrency is safe from hacking, loss, or theft? The problem is that such coverage is too risky for most insurance carriers. Coverage is not widely available, and the coverage that does exist is limited, although this seems to be starting to change with more exchanges and custodians offering various insurance coverage options.
The first insurer to offer any sort of cryptocurrency insurance in the United States was Great American Insurance Group. In mid-2014, it announced it would offer coverage as an “endorsement to an existing crime policy for mercantile and governmental customers who accept bitcoin.”
Fast forward several years, and most cryptocurrency still is not insured. Last November, Coindesk estimated total coverage for all cryptocurrency at $6 billion, versus a total market capitalization of $140 billion. Those figures would mean that only about 4.2 percent of all cryptocurrency is insured.
The insurance industry is highly regulated; the cryptocurrency industry is largely unregulated. Cryptocurrency exchanges aren’t required to insure customers’ funds the same way banks and brokerages in the traditional financial sector are.
Insuring cryptocurrency is also highly risky and has some similarities with insuring cash. It’s easy to lose or have stolen and nearly impossible to recover. You might have renter’s insurance or homeowner’s insurance that generally protects you against theft, but those policies have deductibles and they provide little coverage for cash—the risk of covering it is too great.
The Cost of Crypto Insurance
When risk is high, premiums are high, and that’s certainly true for cryptocurrency. The cost makes coverage unaffordable in many cases. Annual premiums might be as high as 5 percent of coverage limits. That would be like paying $20,000 a year to insure your $400,000 home.
With high premiums, it’s understandable that an exchange might have limited coverage—or no coverage. Even at 2 percent, an exchange would have to pay $200,000 per year for every $10 million in coverage, whereas traditional financial institutions typically pay less than 1 percent.
Coinbase, one of the biggest crypto exchanges, carries insurance for the crypto its clients hold online in hot storage (estimated at about 2 percent of Coinbase’s total holdings). The exchange has not disclosed what coverage it may or may not have for the vast amount of its customers’ holdings (about 98 percent) that are offline in cold storage. The insurance protects against breaches of physical and cyber security as well as employee theft.
Gemini Exchange says it has insurance coverage through Aon that protects against theft of digital assets from its hot wallet. Customer funds stored online are insured against a security breach, hack, fraudulent transfer, or employee theft.
Neither exchange covers losses from access to your account that happens because you’re careless with your keys or login credentials. Traditional financial institutions don’t cover such losses, either. The good news? Your US dollars held in accounts with Coinbase and Gemini are covered by FDIC insurance.
On 2/19/19, BitGo, a leader in digital assets and financial services, announced it had secured the industry’s most comprehensive insurance protections for crypto currencies and digital assets held by either BitGo, Inc. or BitGo Trust Co. will be insured for up to $100 million USD through Lloyds.
In addition, they announced their BitGo Business wallet clients will be able to purchase theft insurance and Lost Key Cover, a key recovery service, for their assets through Digital Asset Services, an insurance provider overseen by the Financial Conduct authority, the UK financial services regulator.
Previous to their recent insurance coverage announcement, BitGo wrote a whitepaper outlining a the three components it says a crypto insurance policy needs to truly protect customers:
- Coverage for third-party hacks, copying, or theft of private keys
- Coverage for internal theft by company employees or executives
- Coverage for loss of keys
It’s also important to know how much insurance coverage an exchange or custodian has, which insurance carriers underwrite the policy and what their financial strength ratings are, and whether the insurance covers both hot and cold wallets.
You also want to know if insurance is provided in dollars or in the cryptocurrency being insured. If it’s provided in dollars (or another government-issued currency), then coverage amounts are always changing since cryptocurrency values fluctuate.
Crypto Insurance for Individuals
If you can’t rely on an exchange to cover your cryptocurrency, can you take matters into your own hands?
A standard homeowners insurance policy provides no coverage for cryptocurrencies. Depending on your insurer, you might be able to purchase coverage as a rider, or you might need to buy a separate policy.
It is the exception, not the rule, for an insurer to offer cryptocurrency insurance. And you won’t find a robust online marketplace to shop for private cryptocurrency insurance in the way you will for auto, homeowners, or life insurance. High net worth individuals may be able to secure custom coverage by working with a cryptocurrency-savvy insurance broker.
Even when an exchange says it has insurance, it’s difficult to know for sure if it’s being truthful, since fraud has been rampant in the cryptocurrency space. Further, an exchange that truly is insured could suffer an incident that insurance doesn’t cover. And an exchange or storage solution that carries insurance could later drop it due to the high cost or insufficient coverage.
If the end if you are most comfortable delegating control and protection over your crypto assets private keys to an exchange, do you homework and select only those exchanges or custodians with robust security systems in place.
Xapo, a Hong-Kong based company provides a bitcoin wallet combined with a cold storage vault that it advertises as a “Fortress” built to securely store your bitcoin by using man, machine, and even a mountain to keep your money safe.
As digital assets become better understood, more widely used, and more widely accepted, we may see the cryptocurrency market mature and more insurance companies stepping in to provide coverage. Startup firm, BlockRE is about to launch what it claims is the first company in the world solely focused on providing insurance to protect holders of crypto assets and users of blockchain systems. Time will tell if others follow suit.
But in this current environment of limited insurance coverage, it remains true that you should not trade your dollars for cryptocurrency unless you have carefully considered and planned for how you will protect your digital assets.
You should strictly follow all the best practices to keep your cryptocurrency safe, including using a reputable exchange, keeping most of your funds in cold storage, and using a trusted hardware wallet.
In summary, even if you have cryptocurrency insurance on your own or through an exchange, it should be your last line of defense.
The information in this article is for informational and educational purposes only. Investing in ICOs, cryptocurrencies or tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.